Following the principles of compound interest, young people have the benefit of time, which, if they consistently invest it in the right things today, will generate good outcomes in the future.
“There is no greater time than now, during National Youth Month, to encourage young people to become financially literate, in order to empower them, prepare them for adulthood and instil good financial habits as soon as possible that will ensure a better more prosperous future for themselves, their families and their futures” states John Manyike, Head of Financial Education at Old Mutual.
South Africa is a youthful country, with over a third of our population under the age of 35. With around 66% of our them being unemployed, it becomes even more important to encourage those that are fortunate enough to be employed, to be financially literate and to look at the benefits of effective money management, savings and investing.
Financially literacy must not be underestimated. Not only will the youth benefit from financial knowledge that will contribute to their personal financial security, but their financial wisdom will also play a critical role in improving our nation’s savings levels. With a better savings culture, our government will be able to invest in infrastructure projects, that will not only create jobs for other youth but will also result in a positive ripple effect for the growth of the economy and long-term benefits for future generations.
When you have just started working, it may feel strange to be thinking about the financial building blocks you will need during your life and even about retirement. After all, shouldn’t this time be spent on enjoyment, buying dream cars, travelling and all the good things that money can buy? That may be, but it is also the ideal time to use your youth to your benefit and begin investing in your future.
Make Wealth Creation a Priority
The unemployed South African youth joining the labour market late will have to race against time to close the asset accumulation gap due to time lost. Entrepreneurship for the youth is critical and should take centre stage instead of formal employment. We need inspired youth to boost the economy by being employers instead of being employees.
Everyone’s financial situation is different, but the steps to having the money you need as you pass through the different life stages are simple:
Compound interest is key for the youth!
Compound interest is an essential concept to understand when managing your finances. It can help you earn a higher return on your savings and investments,
Think about compound interest a bit like what happens when the "snowball effect" occurs. A snowball starts small, but the more snow that's added, the bigger it gets. As it grows, it becomes bigger at a faster rate.
Compound interest is interest earned from the original principal plus accumulated interest. Not only are you earning interest on your beginning deposit, but you're also earning interest on the interest.
Other simple steps to follow:
- Start and stick to your budget
- This is the best way to be the boss of your money, by keeping track of your means and meeting your financial obligations and goals.
- Apply the 50/30/20 rule. 50% of your income to go-to essentials, 30% on what you want, and 20% on savings, investments, and retirement funding.
Pay yourself first
Ensuring that money for long and short-term savings is taken off your paycheque before you begin spending will prevent the urge to buy that pair of new sneakers. Left alone, these funds will benefit from the magic of compound interest and automatically grow. Part of investing in yourself is controlling spending. Using digital banking Apps and the available financial tools on the web can help ensure that you don’t spend what you don’t have.
Enquire about retirement annuity (RA)
Speak to a financial advisor about a retirement annuity (RA). Acquiring an RA means committing yourself to funds that you can only access after you reach the age of 55. The advantages of RA’s are that they are tax-efficient, and when you retire, you are entitled to a tax-free payment of up to R 500 000 from the accumulated funds. Explore this with your financial advisor. Your enquiry must form part of your needs and affordability analysis, which your advisor is obliged to do.
Protect yourself and your assets
The best time to buy insurance is when you are young. Premiums are primarily based on age, so the younger you buy a policy, the more coverage you can afford and the cheaper your premiums.
For most, your 20’s and early 30’s are the most exciting formative years of your life. They are about finding yourself, enjoying freedom, learning, buying what you want and hopefully building a prosperous and sustainable career. With a bit of additional financial wisdom thrown into the mix this knowledge could be the very platform that could enable you to build your financial legacy and following a financial plan that could see you accumulating wealth, securing a happy retirement, and living your exceptional life, concludes Manyike.
PERSONAL FINANCE