The simple answer is no – it is never too early to start saving or investing.
The simple answer is no – it is never too early to start saving or investing. The biggest advantage young investors have is time - time to make mistakes, time to learn and time to enjoy the benefits of compound growth.
Learn to budget
To start saving, you need to learn how to budget. From the time you receive your first pay cheque, work out how and on what you are spending your money. Assess your personal spending habits, be aware of what debt you need to repay and also look at where you can find some spare cash to save.
Make saving a habit
It may need to be a deliberate decision at first, but after a while, saving will become second nature. No one consciously says to themselves, “Let me deny myself now so that my future self can benefit”, but you’ll be surprised what can be achieved with just a few small sacrifices. And, if you find it challenging to be self-disciplined when it comes to saving, consider setting up a monthly debit order. This is a convenient way to save as the amount will be automatically deducted from your bank account.
Take advantage of compound growth
By starting to save when you’re young, you get to benefit from compound growth (or what is often referred to as compound interest). This is where the returns you earn on your investment start earning returns themselves. Consider the following example:
Sally is 20 and decides to save R200 per month in an investment account. By the time Sally is 65, assuming an average annual growth rate of 8% per annum, Sally will have an investment account worth just over R1 million.
Now if Sally only started saving that R200 per month at age 30, by age 65 her investments would only be worth about R450,000. So by starting 10 years earlier and investing only R24,000 more (10 years of R200 per month), Sally would have more than doubled her investments.
Put another way, if Sally only started saving at age 30, in order to match her 20-year-old self saving R200 a month, Sally would have to put away just over R450 per month to get to the R1 million by age 65. And worse, if she only started at age 40 she would need to be saving just over R1,100 a month.
This shows that compound growth is definitely the friend of the young investor.
Investing 101
Once you are familiar with budgeting and have managed to set aside a sum of money to save each month, you will then need to consider how to invest it. This depends largely on your goals, so think about what you want to achieve with your savings. Not all savings are going to be for longer-term goals such as retirement. Most people have at least some short-term goals; like saving for a car, a holiday, or a deposit for a house. For these goals, you should look at investing in products that offer slightly more protection and possibly less of an upside on returns. Remember in the short term, time is not the benefit it is in the longer term, so you need to make sure that your savings are secure, and that you have the greatest chance of attaining your goals. Depending on how short term your savings goals are, investing in a money market account or in government bonds may well be your best option. If your time horizon is slightly longer, then a balanced unit trust with a low allocation to equities may be better. This way, you won’t lose too much if markets take a dip in the short term.
When it comes to long-term savings goals, time will definitely be in your favour. In the longer term you will most likely benefit from investing in higher risk investments such as equities. If you are unsure of how to invest in equities, one of the easiest and most diversified ways of doing so is to invest in an index-tracking fund (either a unit trust or an exchange traded fund). These funds will give you exposure to a broad range of equities at a lower fee than you would pay to have an active asset manager manage your money.
Another question to ask when making investment decisions, is what tax efficient savings products are available? Two products that are best suited for long-term savings, are a retirement annuity (where you can only access your investments at age 55) and a tax-free savings account, which allows you to save without having to pay any tax on the growth of your investments.
Take control of your journey
Finally, once you have started your savings journey, there are just a few more things to take into account to ensure it is successful.
The first is to make sure that with each salary increase you receive, you commit to increasing the amount you are saving. One way to do this would be to keep the percentage of your salary you save, constant. However, it’s also important to consider increasing this percentage over time.
Secondly, make sure you are not impulsive when it comes to investing. As mentioned, time is very important when it comes to investing, so when markets dip, don’t panic and start disinvesting. It’s been proven that after lows, markets revert to their previous levels over time and then go up. So if you disinvest when markets are looking grim, you may not time it just right to be able to reinvest and take advantage of the recovery.
And thirdly, start taking an interest in investment/financial information. There are a large number of articles and books written on the topic and if you start with reading just one article a week, you can get through 52 articles in a year. Imagine how much better your financial knowledge will be after that! If you grow your own financial knowledge as you grow your investments, there’s no doubt you will be able to make even more informed financial decisions.
The information and opinions provided are of a general nature and are not intended to address the circumstances of a particular individual or entity. The information in this communication is not intended, nor does it constitute, financial, tax, legal, investment, or other advice. Sygnia does not act as an advisor or in a fiduciary capacity towards the recipient(s). Sygnia Asset Management (FSP 873) is an authorised Financial Service Provider.