For young adults navigating the financial landscape of their 20s and 30s, the terms “saving” and “investing” often get used interchangeably. While both are crucial for building wealth, they serve distinct purposes and require different approaches. Understanding when to prioritise a savings account and when to embrace the world of investing is key to establishing a strong financial foundation and achieving your long-term goals.
Saving: The safety net
Saving means setting aside money in low-risk, highly liquid accounts, such as a traditional or digital savings account. The main advantages are safety and accessibility. Savings accounts are ideal for short-term goals, such as buying a new phone, planning a vacation, or building an emergency fund. The money is protected, easily accessible, and typically earns a modest but guaranteed return through the savings account interest rate.
- Liquidity: Savings accounts allow you to withdraw funds instantly for emergencies or planned purchases.
- Low risk: Your money is protected from market fluctuations, making savings an ideal choice for short-term needs and unexpected expenses.
- Short-term focus: Use savings for goals you plan to achieve within a year or two or as a buffer for life’s surprises.
Investing: The growth engine
Investing involves putting your money into assets such as stocks, mutual funds, or bonds, with the goal of achieving higher returns over the long term. Investments carry more risk, but they also offer the potential to outpace inflation and accumulate real wealth over the long term.
- Higher returns: Historically, investments in equities and mutual funds have delivered much higher returns than savings accounts, especially over periods of five years or more.
- Risk and reward: Investments are subject to market ups and downs, meaning you could lose money in the short term, but over the long run, the odds of strong growth improve.
- Long-term goals: Investing is best suited for objectives such as retirement, buying a house, or funding a child’s education—goals that are years or decades away.
Why is it important to pursue both?
While saving and investing serve different purposes, both are essential for a healthy financial strategy in your 20s and 30s. Experts recommend first building an emergency fund—typically three to six months of living expenses—in a savings account or digital savings account for quick access and peace of mind. Once your safety net is in place and you have no high-interest debt, start channelling surplus funds into investments for long-term growth.
How do you balance saving and investing?
During your 20s and 30s, you may be uncertain about how to manage your finances, which can lead to blunders. Here are some tips that will help you manage saving and investing.
- Start with saving: Open a digital savings account and automate monthly transfers to build your emergency fund and save for short-term goals.
- Gradually invest: As your income grows, and your safety net is secure, begin investing regularly—such as through Systematic Investment Plans (SIPs) in mutual funds or direct stock purchases.
- Adjust over time: In your 20s, you can afford to take more investment risk because you have time to recover from market downturns. As you approach your 30s and your goals become more pressing, gradually increase your savings to meet upcoming needs.
Conclusion
In your 20s and 30s, prioritise both saving and investing, but in the right order: save first for emergencies and short-term goals using a savings account or digital savings account, then invest for long-term wealth creation. This balanced approach protects you from life’s uncertainties while giving your money the best chance to grow in the future.