Your Money, Your Future: The Art of Saving & Investing

Your 20s are a crucial time for setting the stage for a financially secure future. While it may seem overwhelming to navigate the world of saving and investing, fear not! This article will guide you through the essentials.

Your financial journey begins with mastering the art of saving. We'll explore smart strategies to identify your savings goals and accelerate debt repayments. Every dollar counts, and laying a strong foundation today will pay dividends in the years to come.

But that's not all—we'll also introduce you to the world of investing. Don't worry; you won't need a crystal ball or a fancy financial degree to get started. We'll demystify concepts like compounding interest, the difference between passive and active investing, and diversification, helping you make informed decisions that align with your risk tolerance and financial goals.

While we promise to steer clear of unnecessary jargon, we won't sugar-coat the challenges you might encounter on this journey. Investing involves risks, but armed with knowledge and a prudent approach, you can confidently weather the storms and reap the rewards.

So, whether you're just stepping into the workforce or already on your career path, it's never too early to take control of your financial future. Let's equip you with the know-how to make informed choices, avoid common pitfalls, and make the most of the exciting opportunities that lie ahead.

Saving Or Investing? Spotting The Distinctions

Let's make the distinction between saving and investing clear and friendly. This understanding will empower you to make well-informed decisions, optimising your financial strategies effectively.

Our goal is to make your journey towards wealth-building enjoyable and empowering.

Saving and investing are two distinct financial strategies that play complementary roles in building wealth. Saving involves setting aside a portion of your income in a safe and easily accessible account, typically a savings account, for short-term goals or emergencies. It is the foundation of financial stability, providing a financial cushion to cover unexpected expenses and ensuring peace of mind.

Investing involves putting your money to work in various financial instruments, such as stocks and shares (partial ownership in a company), bonds (loans on which you receive interest from the borrower), or real estate, to generate returns over time. Investing carries a higher level of risk but offers the potential for higher rewards and is vital  in achieving long-term financial growth and building wealth for the future. The key distinction lies in the time horizon and purpose: saving is for short-term needs while investing is a path towards long-term financial prosperity. Balancing both strategies is essential in creating a robust financial plan that meets your current needs and secures your financial future.

In a nutshell, savings is a pot of money stashed away, investing is making your money earn more money.

What To Do Once You’ve Built Up Your Emergency Fund

An emergency fund is a financial safety net, an essential part of any sound financial plan. It represents a pool of money set aside specifically to cover unexpected expenses or emergencies, such as medical bills, car repairs, or sudden job loss. Building an emergency fund provides financial security and peace of mind, shielding you from resorting to high-interest debt or derailing your long-term financial goals during challenging times.

Once the emergency fund is well-established, a world of opportunities emerges. With the confidence of having a financial buffer, you can turn your attention to other savings goals. Whether it's saving for a dream vacation, a deposit on a home, or funding further education, having an emergency fund in place creates a solid foundation for your future aspirations.

Moreover, the cushion of an emergency fund allows for accelerated debt repayments. By directing surplus funds towards paying off debts like credit cards or student loans, you can reduce interest payments and become debt-free more quickly, freeing up even more financial resources for future investments.

Having an emergency fund also provides the freedom to explore investment opportunities. With the comfort of knowing immediate needs are covered, you can delve into the world of investing with a sense of security so that you can focus on your long-term strategy.

Identifying Your Savings Goals

Identifying your savings goals is like drawing a map to your dreams, and it all begins with introspection. Take a moment to consider what truly matters to you—your values, passions, and aspirations. Your savings goals should align with your unique vision of a fulfilling life.

Start by asking yourself some essential questions. What do you want to achieve in the short-term and long-term? Are you looking to travel the world, pursue higher education, or buy a home? Understanding your values and aspirations will serve as a compass, guiding you towards meaningful and purposeful savings goals. This can be a challenging conversation, and something we at Lifetime specialise in to help clients uncover their core money values.

While it's natural to dream big, remember to balance your aspirations with practicality. Assess your current financial situation and be realistic about what you can achieve within your means. Setting achievable milestones will help you stay motivated and measure your progress along the way. In this process of self-discovery, don't be afraid to revise and refine your goals over time. Life is dynamic, and so are our dreams. As you grow and evolve, your savings goals may also shift to reflect your changing priorities.

By identifying your savings goals through the lens of your values and aspirations, you will create a roadmap that fuels your financial journey with purpose. Your savings will become more than just numbers; they will represent the stepping-stones towards your best life.

Introducing Yourself to the World of Investing

Getting started with investments is an exhilarating step towards growing your wealth, and it's essential to navigate the landscape with prudence. Let's dive deeper into three crucial aspects: the choice between passive and active investing, compounding interest, and diversification.

1. Passive vs. Active Investing: Picking Your Path

When it comes to investing, you have two main strategies: passive and active. Passive investing involves building a diversified portfolio that mirrors a market index, like the S&P 500, and holding onto it for the long-term. This approach seeks to match the overall market's performance and often carries lower fees compared to active investing. On the other hand, active investing involves picking individual stocks or funds in an attempt to outperform the market. While it may offer the promise of potential for higher returns, active investing demands more time, and research, and often incurs higher fees.

Deciding between passive and active investing depends on your investment philosophy, risk appetite, and level of involvement. Passive investing aligns with efficient markets and diversification principles, offering more clarity around your returns through tracking market indices. While active investing may attract those who enjoy hands-on management and have higher risk tolerance, evidence suggests that achieving consistent and superior returns through active strategies is challenging.

2. Compounding Interest: The Magic Of Time

Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.” Compounding interest is the financial superpower that rewards patience and consistency. As your investments grow, they generate returns, which in turn, reinvest and generate even more returns. Over time, this snowball effect can lead to exponential growth of your wealth. Starting early with investments allows you to take full advantage of compounding interest, giving your money ample time to work its magic. Remember, even small, regular contributions can make a significant difference when allowed to compound over the long term. So, buckle up, let time be your ally, and watch your money flourish. 

3. Diversification: Spreading Your Financial Wings

Diversification is the golden rule of smart investing. It involves spreading your investments across a range of asset classes, such as stocks, bonds, real estate, and more. By doing so, you can mitigate risks associated with market fluctuations and avoid putting all your eggs in one basket. Each asset class performs differently under various economic conditions, so diversification acts as a shield, helping balance potential losses with gains. As you set sail on your investment journey, remember that diversification is your compass, guiding you to build a well-rounded portfolio aligned with your risk tolerance and financial goals.

Investing With Apps

Using an investment app can be fun, but it can also come with certain drawbacks. To determine if the platform aligns with your financial objectives, it is wise to assess your investment needs, risk tolerance, and long-term goals beforehand.

Pros:

• Accessibility and Convenience: Investment apps allow users to access their investment accounts anytime, anywhere, through their smartphones or tablets. This convenience makes it easy to monitor portfolios, make trades, and stay updated on market trends on the go.
• User-Friendly Interface: Investment apps are designed to be user-friendly and accessible to individuals with little to no prior investing experience. They often provide educational resources and tools to help users make informed decisions.
• Automated Investing: Some investment apps offer robo-advisory services that use algorithms to create and manage diversified portfolios based on individual risk tolerance and financial goals. This automation simplifies the investment process for users.

Cons:

• Lack of Human Interaction: Evidence shows that individual or inexperienced decisions made in these apps can lead to poor outcomes. By building a comprehensive portfolio with an expert financial adviser, studies have shown that investors are more likely to achieve higher returns from their investment portfolios[1].
• Security Concerns: Although investment apps employ various security measures, the digital nature of these platforms poses inherent cybersecurity risks. Users need to be vigilant about protecting their personal and financial information.
• Potential Overtrading: The accessibility and ease of use of investment apps can tempt some users to engage in excessive trading or make impulsive investment decisions, which may lead to higher costs and suboptimal returns.
• Limited Investment Options: Some investment apps may have a restricted range of investment products, limiting users' choices compared to traditional brokerage accounts.

Investing apps can be a fun way to learn the ropes of investing, but it’s a good idea not to invest too much of your wealth into them before consulting a financial adviser to ensure that you are on the right track. A good rule of thumb to aim for is to limit your deposits to about 10% of your investment value to help mitigate risk of potential losses.

So, Now That It’s Time To Start Mastering The Art…

The truth is that the basics of saving and investing to build wealth in our 20s aren’t rocket science or some special secret. It’s really just tried and tested, practical principles.

In your 20s you actually have the greatest wealth-building asset of all – time. But that only helps if you take advantage of it.

Armed with the knowledge of passive vs. active investing, the wonders of compounding interest, and the importance of building an emergency fund, you're now equipped to make the important first steps that will set you up for life.

By mastering the discipline of saving and investing, you set the course for a life that's not just financially secure but filled with choice and freedom. So, embrace your aspirations, set your sights high, and let your savings propel you towards a future that's uniquely yours.

[1] https://www.stewartgroup.co.nz/we-love-to-write/2019/12/9/defining-adviser-alpha

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.