Far too often the financial habits of most individuals in their 20s are characterised by spending too much money and consumption-led indebtedness, but in theory, it need not be this way.
Far too often the financial habits of most individuals in their 20s are characterised by spending too much money and consumption-led indebtedness, but in theory, it need not be this way.
This is the view of Duane Gilbert, head of manager research at Sygnia Asset Management, as individuals in their 20s have the advantage of time when embarking on investments.
Being in your 20s would typically mean that you have a good 40 year investment time horizon, as you have recently graduated or are a new entrant in the job market.
This is an opportune time for financial planning and investing to be prioritised. But this is seldom the case.
As Gilbert puts it: “The big problem is that the lifestyles of young people are being upgraded too fast especially if they are earning money for the first time. That means spending too much money on a car, clothes and technology, which inevitably gets funded by debt.”
As a result individuals in this group find themselves without any savings and over time develop bad financial habits.
The issue is that most individuals in their 20s are not knowledgeable about investing, which Gilbert says is often a daunting topic.
“It is such a shame, because how you manage your finances, especially in those first 20 years of working are very crucial,” he says.
Another problem is that there is an over-reliance on advice from investment professions who sometimes make investments too complicated to understand.
In this scenario, Gilbert says individuals need to do homework to overcome this hurdle. “At the end of the day, this is your money and if you don’t take care of it, it is your problem. You need to take ownership of it,” he suggests.
Another popular perception is that investing requires a lot of capital, resulting in individuals being put off by investing. Gilbert emphatically dismisses this, saying there are many affordable investment classes available (see Gilbert’s investment class suggestions below).
In simplistic terms, the earlier one starts prioritising investing the better. In many cases once individuals adopt a lifestyle they cannot afford, it becomes hard to live within their means, leading to further indebtedness.
Also, when individuals see the potential growth of investments, it might make them reconsider investing.
Gilbert says individuals need to understand the power of compound interest, meaning that money invested grows faster if it’s maintained over many years. For example, he says if R100 is invested at a rate of 11% (roughly CPI plus 5%), over five years, the initial investment would accumulate to R168. In ten years, it would balloon to R283. In the second five years, your investment has grown 1.7 times more than in the first five years because of the compounding effect.
The starting point
Before embarking on any investment, Gilbert says that individuals need to get out of consumption-led debt first, given the high-interest rate that is already being paid. Most important is getting out of your car debt, as “it is a consumption item and not an investment.”
Other basic starting points include creating a budget, in that way, allocations towards savings can be determined. Gilbert says it’s a good rule of thumb to have three to six months’ worth of emergency savings.
Being in your 20s is also a good time to think about risks. However when you are young, thinking about insurance may seem unnecessary. Gilbert says insurance – such as vehicle insurance, life cover (if you have dependents), medical aid and disability cover – is important.
Other investment classes
Although retirement might seem years away, it is good to open a retirement annuity. Put away at least 15% of your gross salary away and forget about it, says Gilbert.
Investing in property is a good idea, as this is a long term investment. “Ideally, this is the only debt you want in your life. Rentals are a waste of money. Property is an investment and values increase over a long time.”
Individuals in their 20s have the propensity to take on sensible, well diversified risk. Now is the time to allocate capital to growth asset classes such as equity, property and offshore equity.
A simple and affordable investment vehicle is unit trusts, which are a diversified portfolio of assets such as cash, equities, bonds and cash, typically requiring minimum monthly contributions of R1 000. Another option is investing in a tax-free savings account, for annual amounts of up to R30 000. “What you want is a simple, well diversified portfolio at the lowest possible fee.”
As with any investment, the longer you invest the better. “It’s not about beating the market. It’s about being in the market for a long time,” Gilbert stresses.