Life in your twenties is generally filled with adventure and a sense of reckless abandon as you’ve been set free from the shackles of school life and are now paying your own way, says Walter van der Merwe, CEO, FedGroup Life. The freedom that a regular income brings can be intoxicating and many young people choose a life of care-free spending.
Few 20-somethings therefore give a thought to saving even just a small amount each month toward their retirement. It’s understandable given their circumstances, but if more young people adopted a basic approach to saving earlier in life they would set themselves up for a very comfortable future, cautions Van der Merwe.
This is largely due to the power of compound interest, which means a little saved over a long time can deliver big returns. Take, for example, someone who invests R15,000 at the age of 25 in an account paying 5.5% compound interest annually. Twenty five years later that amount would have grown to R57 200.89. By contrast, if that person invested the same amount at the same interest rate at the age of 35, it would only have grown to R33,487.15 by the time they reached the age of 50.
“Granted, most 20-somethings don’t have a lump sum to invest into a retirement savings plan, but it is a simple example that illustrates that the longer you allow compound interest to work, the more money it will make for you,” he says. With that in mind, a small monthly contribution of just a few hundred rand invested each month from the day you start earning an income would be the best place to start. Obviously the smaller the amount with which you start, the longer you need to leave it invested to accumulate significant interest, but the basic principle applies.
Choose a savings plan that has a low monthly minimum contribution, but one that stops you from accessing your money immediately. This will ensure you don’t give in to life’s temptations, of which there can be many in your twenties, and withdraw the funds.
Avoid unnecessary risk
While conventional investing advice would advocate investing in higher risk funds and investments when you’re young and therefore have a longer investment horizon, it is always best to avoid unnecessary risk when it comes to investing for retirement. Start investing in a stable fund that offers solid returns, and when you start earning more money or choose to invest more, start a discretionary investment fund that can be used for riskier options that yield higher returns.
Investing in this manner in your twenties will also help develop good savings and retirement planning habits early on, which will prove invaluable as life’s expenses and financial commitments grow in unison with your monthly income the older you get. In fact, starting early is ideal as you tend to have more expendable income available, before family commitments and mortgage repayments start to bite into your monthly budget. In this instance, saving becomes more about “not spending” than finding the money to actually invest.
Starting early will also ensure that you have more time at your disposal to correct any financial mistakes or shortfalls that occur.
The fact of the matter is that by missing the opportunity to start investing early on in life when you have the means and ability to do so comfortably, you’ll merely be holding back the potential of your retirement investments in the long run.
Article by News 24