DO you know that if you are 25 years old, you have about 480 pay days to your retirement?
Surprisingly many in their twenties think it’s too early to start investing towards their retirement.
Leon Campher, CEO of the Association for Savings and Investment South Africa, told SunMoney that the most important financial advice for people was to start investing as soon as they started earning a salary or income.
“With the power of compounding, even small amounts invested over a long period of time could turn into a substantial sum of money,” he said.
This is best explained using the example of a 25-year-old and a 35-year-old who both commit to investing R500 a month in a South African Multi-Asset High Equity unit trust fund until they reach the age of 65.
While South African Multi Asset High Equity portfolios have on average delivered returns of 13,6% over the past 20 years, this example assumes that each investor achieves a more conservative annual return of 10% (after deducting costs).
The 25-year old will have invested a total of R240 000 by the age of 65 years and the 35-year old R180 000 – only a R60 000 difference.
But compounding will ensure that the 25-year-old investor will be able to retire with a princely sum of nearly R3,2 million while the second investor would by contrast retire with just R1,1 million.
To make up for the shortfall and achieve the R3,2 million, the 35-year- old would need to invest nearly triple the amount each month, or R1 400.
Campher shared the following tips for young adults as they become financially independent:
- Create a detailed budget: Having a budget means that you will know exactly what you are spending. This is a vital financial tool that will help you cut back on unnecessary expenses and look for additional ways in which to save.
- Pay off your debts as quickly as possible: Once you have cut back on your expenses, channel funds into repaying your short-term debt with high interest rates such as credit cards, clothing accounts and car loans.
- Create earning opportunities: If your salary is not enough to cover your basic living expenses, consider getting a second job. Use the additional income to build up a nest egg and keep yourself out of debt.
- Make savings easy: Begin prioritising your savings by setting up a monthly debit order into a long-term investment like a unit trust fund.
