This episode, we share tips and insights to help listeners decide between savings versus investing based on personal goals and time horizons. Would you rather listen than read? You can find the episode in full at the bottom of this article!

We suggest using SMART goals to make your plans easier to achieve. Short term goals like saving for a holiday are best served by putting money in a savings account. On the other hand, long term goals such as retirement benefit from investing money in stocks or ETFs. We also discuss the potential risks and rewards of saving or investing for medium term goals such as saving for a house deposit.

Further, we explore the process of putting money into retirement accounts (Super in Australia or 401k in the US) to achieve milestones like FIRE (Financial Independence, Retire Early) .

By the end of the episode, we hope to help our listeners remember that taking time, risk management, and realistic planning are the keys to any saving and investing plans.

Setting your SMART goals

First things first, let's talk about why setting goals is so important. Without knowing what you want to achieve, it can be hard to figure out how to get there. So, we always recommend starting with setting some specific goals.

We like to use SMART goals. These goals are specific, measurable, achievable, realistic, and time-based. SMART goals are broken down into smaller, more manageable tasks to improve your success in achieving them.

For example, if you want to save a $50,000 deposit to buy a house in five years, you’ll have to save $10,000/year or $192/week.

It's important to be realistic when setting your goals. Ask yourself: is it achievable? Do you have it in your budget? Make sure to set a specific timeframe and get clear on what steps you need to take to achieve it.

Short term goals don’t take much time to achieve, like saving $5,000 for a holiday to Europe next year. Longer term goals are 5+ years, like wanting to retire in 15 years with a passive income of $40,000/year. Each timeframe requires different approaches, which we will dive into below.

Saving vs investing depending on goals

What’s the best option between saving and investing for different financial goals?

Starting with short term financial goals: these are usually goals that we want to achieve in less than a year. Examples of short term goals include saving for holidays, preparing for an unpaid uni placement, or going on parental leave.

For this kind of goal, you may want to put your money into something like a savings account. While the interest rates may be low, savings accounts offer stability and liquidity. You can easily access your money anytime from your savings account to pay for urgent expenses.

If you have long term financial goals or want to grow your wealth over time, investing might be the better idea. Examples of investing options for this include buying specific companies and exchange-traded funds (ETFs) or index funds —whichever you prefer.

The investments mentioned above offer higher potential returns, but also carry more risk than savings accounts. In this case, we suggest that long term goals should be at least seven years. It’s important to note as well that investing is appropriate only for money that won’t be needed for at least 7-10 years.

With medium term goals, it can be a little bit more tricky to decide whether to save or invest. Let’s say you are saving for your house deposit and you want to buy in 3-5 years. Whether you invest in shares or just put your money into a savings account depends on your risk tolerance, and how flexible your plan is.

Investing is more risky, but has the potential for higher returns. On the other hand, cash is safer, but doesn’t have the same potential for higher returns.

If you decide to invest, you need to be aware that market crashes or corrections are part of the process. If you can be flexible with your timeline and wait for the market to recover, then investing might be for you. When you have to sell eventually, you’ll need to take into account Capital Gains Tax (CGT) of your investments.

Long term investing to achieve FIRE

When it comes to investing for the long term, you need to have a goal in mind. So, what are some of our long term goals? Well, financial independence and retiring early (FIRE) is definitely on the list, as is generating a supplementary long term income. Of course, for some people, there's also the idea of living a work-optional life.

Let's talk about the FIRE goal specifically. Let's say you're aiming for a passive income of $40,000 a year. If we use the standard 4% safe withdrawal rate from the Trinity Study , you'll need a $1 million share portfolio. We know this sounds like a big goal, but FIRE is achievable with a little bit of planning and patience. Let’s break it down below.

One way we can all achieve these long term goals is by putting our money in a retirement account. In Australia, we invest in superannuation, but in other countries, it might be a 401k (United States), a Kiwisaver (New Zealand), or an RRSP (Canada).

Another approach is putting money in passive, long term funds such as index-tracking ETFs. When you invest in ETFs, you're investing in something similar to your retirement account. While no-one can say that it's 100% safe, it's unlikely that the whole stock market will crash. And if it does, we'll have bigger things to worry about!

If you're looking to achieve any of the long term goals above, long term mindset is key. That means giving your investments time to grow. The longer your timeline, the lower the risk, because you can ride out the market corrections. A longer horizon also puts your mind at ease knowing you won’t sell in a panic when the market is down.

For example, when investing in ETFs, remember to look at the total return, including dividends. Don’t just focus on the daily share price. It’s the compounding returns over time that will help you achieve your financial goals in the long term.

Now, before we move on, we want to make it clear that investing involves risk, and it's always possible to lose money. It's important to do your research and consult with a financial advisor before making any investment decisions. The best approach is to strike a balance between saving and investing that aligns with your financial goals and risk tolerance.

How to balance saving and investing for multiple goals

We all want to achieve our goals a little faster (who doesn’t?). Still, it's important to balance saving and investing, starting with small and strategic approach. You don't want to go all-in on investing and saving only to burn out after a few months. Instead, keep your approach realistic and make it a long term habit.

Of course, being flexible is also key. While having a goal is good, you should also be prepared to change your mind and adapt as needed. Your time horizon is also an important factor to consider. The longer your time horizon, the more patient you can be with your savings and investments.

But before you start investing, we suggest preparing for any emergencies to protect your financial plans. If you don't have an emergency fund already, saving for one should be your first goal. An emergency fund can help us navigate unexpected expenses without derailing our financial goals and going into debt.

So, what's the best way to build an emergency fund? A good rule of thumb is to save three to six months of your current living expenses. We recommend starting small and being consistent until you reach that amount. Even if you can only afford to save a few dollars a week, that's better than nothing.

Generally, your emergency fund should be able to pay for critical expenses (like food and utilities) and a bit of lifestyle.

But as the recent tech layoffs and pandemic have shown, three to six months worth of emergency fund might not be enough. If it’s feast or famine for you, or you're expecting an economic recession, it’s recommended to save up to 12 months of expenses. You may also include some extra money for education and training in case you lose your job or switch careers.

Ultimately, the amount and expenses covered by your emergency account depends on personal factors. It could be income stability, lifestyle, career plan, savings rate, or risk perception, among others.

To balance saving and investing effectively, there are a few things to consider. First, keep track of what you spend so you know where you can save money. Depending on your type of debt , decide whether to save, invest, or pay off your debts first. It's different for everyone, so choose what's best for you.

Setting smart goals is also crucial to help you stay on track. We also recommend opening a high-interest savings account and naming your accounts based on your goals. Lastly, automate as much as possible to take the guesswork out of saving and investing. Automating your finances helps you stay consistent over the long term.

When it comes to interest rates, savings accounts usually offer an average of 4-5% while investments can offer 6-9%. However, things change and savings accounts are now more attractive, and interest rate rises are part of the economic cycle. Keep in mind that you have to pay tax on both your savings account and investment earnings.

Meanwhile, when you invest your money, you’ll notice that market corrections are a regular part of the journey. It may be worth being flexible with your timeline and understanding the risks. Market crashes can historically take years to recover, and in some cases even more than a decade! If you can’t wait that long and you decide to sell during a correction, there’s a chance you may lose money.

Actionable takeaways from this episode

Time to take action! We suggest you keep track of your expenses for a week or a month to see where your money goes. This will help you see where you can save money.

Next, decide on the goals you want to achieve. These goals can be short term, like saving for a holiday, or long term, let's say saving for retirement. Having specific goals can help you stay motivated.

For short to mid term goals, open a savings account that pays more interest than a regular account. This can help you reach your goals faster.

For long term goals, like buying a rental property or financial independence and early retirement, open an investing account . This can potentially earn you more money in the long run.

Once you know your goals and which account to open, set a specific amount of money to put in that account each month. This will help you make progress toward your financial goals.

You know what they say—life is a marathon, not a sprint. This is true as well in any financial journey. But with these actionable steps, you’ll be on your way to a solid financial journey. Listen to the full episode below to join our conversation, and we’ll see you next time!