Why You Should Start Saving Early
Our early twenties is a glorious age. We complete our studies, embark upon our careers, move out of our childhood homes, discover the freedoms we were denied during our teenage years, and indulge in daily doses of instant gratification. It is a time of liberty, opportunity, ambition, and of looking forward to life. But, the very last thing on our minds when we’re in our twenties is retirement. That’s looking forward a little too far...
or so we erroneously think.
Saving and investing in our twenties can make a truly staggering difference to our wealth in the long run. And as much as we’re distracted by the costly demands of becoming independent adults, we should not neglect those long-term financial goals. To illustrate, let’s take a look at a simple example involving two hypothetical individuals, Allison and David:
Starting at the age of 25, Allison puts R2,000 into a retirement account every month. David also puts R2,000 into a retirement account every month, but he only started investing at the age of 35. Skipping forward a few decades, they both retire at the age of 65. In that time, Allison has channelled R960,000 into her retirement fund, while David’s contributions have amounted to R720,000. Now, let’s factor in an estimated 6% rate of return and the impact compound interest has and, at retirement, Allison will have saved R4,024,924 million, whereas David will only have R2,031,180!
Allison’s R960,000 investment has become R4 million.
David’s R720,000 investment has become R2 million.
So, you see: Saving for retirement earlier has a significant, exponential impact on the wealth you’re able to build. Even though Allison only contributed 35% more to her retirement, she has been able to build a retirement fund of almost twice as much as David’s.
Unfortunately, most people in their early twenties are too busy setting themselves up in life (buying a car, furnishing a place, travelling, etc.) and paying off student loans to even think about saving money. But that doesn’t mean it’s an impossible task....
Save, No Matter How Little
You don’t need to save a lot of money every month to make a difference. Some months (and some years) will be leaner than others, especially in our twenties, but as long as you’re putting aside something, you’ll be taking steps towards your long-term goals.
Speak to a Financial Advisor
When you’re young, time is on your side, which means that you can afford to shoulder more investment risk. While medium to high-risk investments tend to fluctuate more wildly than low-risk investments, over the long run, they can deliver a much higher return on investment. Speak to a financial advisor to see what they recommend and think about diverting a portion of your savings into a variety of investments.
Pay Off Your Debt, Yes, But Also Save
Saving money and paying off debt are both very important financial goals, but one shouldn’t be sacrificed in the interest of the other. If you focus exclusively on debt, you’ll have no savings to fall back on in case of emergency, which means you’ll just be adding to your problems when you use your credit cards to bail you out. If you focus exclusively on saving, you’ll be hit hard with student loan and credit card, etc. interest rates. You need to balance both.
The ultimate financial goal in anyone’s life is not just to build sufficient wealth to survive your retirement years, but to be able to live when you retire. You may be a few decades’ away from that point, but saving and investing right now can deliver exponential rewards. Establish a budget, get insured, expand your financial knowledge base, and avoid excessive and unnecessary spending and you’ll be able to put the gold in your Golden Years!