With only 480 paydays from 25 to retirement, investing should be a priority

Leon Campher, CEO of ASISA.

It is easy as a twenty-something to put off investing until a distant ‘some day’ when you will earn more. However, if you begin investing at the age of 25 years and earn a monthly salary until the age of 65 years, you will in fact only have 480 paydays ahead of you before you retire.

Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), states that the most important financial advice for young adults is therefore to start investing as soon as they start earning an income.

“Many twenty and even thirty-year olds put off investing because they believe that they still have plenty of time to save for the future. The reality, however, is that the future is much closer than you may think,” he says.

He therefore urges young earners with time on their side to tap into the phenomenal power of compounding, where growth on your capital invested achieves more growth. “With the power of compounding, even small amounts invested over a long period of time could turn into a substantial sum of money,” he explains.

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. However, compounding will ensure that the 25-year-old investor will be able to retire with a princely sum of nearly R3.2 million. 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 emphasises that while future investment performance is never guaranteed, this example demonstrates the significant effect 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 states.

“You therefore need to make a critical choice from your very first salary. Are you going to be someone who will spend first and save if anything is left, or are you going to prioritise saving and investing and then spend what is left? This early choice is one of the most important financial decisions you will make.”

He also notes that while your budget may be tight as you are starting out your career, the example shows that you do not need significant amounts of money in order to begin investing towards a financially secure retirement.

“You could for instance begin by saving as little as five per cent 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,” he says.

“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.”

“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.”

He offers the following additional tips for young adults as they become 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.

2. 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. 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.

3. 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.

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.

5. Consult a financial adviser: You are never too young to seek professional advice. A financial adviser will be able to help you to choose the right investments and create a financial strategy to meet your short-term and long-term goals. An adviser will also guide you in protecting yourself adequately against the financial consequences of unexpected events such as death and disability.

*A Multi Asset High Equity unit trust fund is a collective investment scheme (CIS) that invests across a range of asset classes (equities, bonds, cash and property) with the aim of delivering inflation-beating returns over the long term. Because at age 25 you have at least 40 years of investing ahead of you, your investment portfolio should be structured for maximum long-term growth through high equity exposure, but with enough diversification across the different asset classes to provide protection against volatile markets.