How many paydays left till you retire?

Saving in your twenties is for some a foreign concept because you tell yourself that “you’ve got your entire life ahead of you to do so”. But according to Association for Savings and Investment South Africa’s (ASISA) research, you only have roughly 480 paydays ahead of you before you retire.

CEO of ASISA Leon Campher says: “The most important financial advice for young adults is therefore to start investing as soon as they start earning an income.”

Young earners are further encouraged to tap into the phenomenal power of compounding, where growth on your capital invested achieves more growth, adds Campher. “With the power of compounding, even small amounts invested over a long period of time could turn into a substantial sum of money.”

Saving example

ASISA offers the following example: A 25-year old and a 35-year old 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. However, 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, who started saving later, 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 emphasises that while the investment performance is never guaranteed, the example serves to illustrate the importance and value that ‘compounding, time and a consistent approach to investing can have on the growth of your money.’

“Your retirement is actually like an exam, your best guarantor of success is preparing well in advance rather than trying to cram all of your work into the eleventh hour,” he adds.

It is also worthwhile noting that especially when starting out, one does not necessarily need to save significant amounts of money. Starting small is still a start.

“You could for instance begin by saving as little as 5% of your salary, and set yourself the goal of gradually increasing this amount each month by cutting back on your expenses. Then as your base income increases, rather increase your savings than your expenditure on unnecessary things,” explains Campher. “This means being strict with yourself and not squandering your money on dining at expensive restaurants, buying designer clothing or running up debt on your credit card.”

Financial advice

He offers the following tips for young adults who are on their way to becoming financially independent:

  1. 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. This will only work though if you take a decision to save first before spending what is left,” Campher states.
  2. Pay off your debts: Rather than living lavishly, channel funds into paying off your short-term debt such as credit cards, clothing accounts and car loans. “Short-term debt can quickly balloon and shift your finances into the red. Then focus on paying off long-term debt with lower interest rates such as student loans and home loans,” he highlights.
  3. Create your own earning opportunities: Should your salary not be enough to cover your basic living expenses, consider getting a second or part-time job. Use the additional income to build up a nest egg and inevitably keep yourself out of debt.
  4. Make savings easy: “Begin prioritising your savings by setting up a monthly debit order into a long-term investment like a unit trust fund. This will help you to avoid the temptation to spend the surplus in your bank account,” Campher suggests.
  5. Consult a financial adviser: You are never too young to seek professional financial advice. A financial adviser will be able to assist you in choosing the right investments for your pocket and needs.

“Remember that while basic living expenses such as food, transport and rent cannot be ignored, the point is to live reasonably well during your life, not excessively, in order to cater for your life beyond your working years,” Campher concludes.