Put time to work, Absa Investments tells young savers

YOUNG people with little disposable income to save should leverage their biggest asset instead … TIME!

The July Savings Month tip comes from Absa Investments, the investments and wealth arm of the Absa financial services group.

Young people in their 20s have great potential as wealth-builders, says Sylvester Kgatla, Head of Product at Absa Investments. The problem is they often fail to realise it.

“Don’t delay regular saving just because you can’t put away very much month by month,” says Kgatla.

“Time can be just as important as money; especially if you have lots of it, and young people do.”

Time helps to manage risk in the asset category with the greatest potential as a wealth generator – equities.

Recent JSE history bears this out.

Historical total returns on the exchange’s All Share Index show big losses in 2002 (down 10%) and 2008 (minus-30%!), but investors who simply stay in the market can more than make up the losses … with gains of 20% in 2003, 30% in 2004, 50% (!) in 2005, another 50% rise in 2006, 20% in 2007% and 40% in 2009. In 2010, the JSE again did well, advancing by nearly 19%.

“Time allows young people to commit to a relatively risky asset class like shares and still make good solid returns in the long haul,” says Kgatla. “Older people have less time to make up for the bad years.

“This is a huge advantage enjoyed by youth over age.”

Even in more conservative savings instruments, time has magical effects on a nest egg – as long as you start early enough and save year after year.

“Compound interest can work miracles given enough time,” notes Kgatla.

Practical examples using simple rounded numbers illustrate the point.

Assume a middle-aged saver puts away a lump sum of R10 000 and saves another R1 000 a year for 10 years at an interest rate of 10%. Within a decade the nest egg will have grown to R43 468.

Now consider the case of a young saver who commits the same lump sum and adds R1 000 a year at a 10% rate … but maintains this discipline for 30 years. At the end of the period, the investment is worth R355 437.

“The maths lesson is simple,” adds Kgatla. “When you’re young time is on your side. Use it.

“You might not be able to save much, but at least commit something and stick with it. As the Absa Investments’ slogan points out ‘You’d be surprised what you can accomplish when you start with what you’ve got’.”