By Zuhair Allie
As we observe Youth Month, we’re reminded of the power that young people have in shaping a better future for themselves and for others.
For young individuals, one way to do this is by developing good financial habits early on in life and reaping the rewards later, by starting to invest as soon as possible.
We share some ways that you can start building from your first pay cheque that will benefit you in the long run.
Start early, start small
By starting early and investing consistently over the long term, you allow your money to grow over a longer period, which can lead to substantial wealth accumulation and financial security.
You will have a significant time advantage if you start from an early age due to the power of compounding. This is where the investment returns you earn today build on the returns you earned yesterday along with your contributions.
The longer this process continues, with returns reinvested and few withdrawals, the lower your chances of loss and the higher your odds of a better future, even if you don’t yet know what your goals are.
The later you start investing, the more you need to save and invest to reach your financial goals. On the other hand, the earlier you start, the less you have to invest later in life.
A sound strategy is to start by investing in unit trusts from as little as R500 a month, and then increase this amount by a minimum of the inflation rate every year.
Also, every time you receive a salary increase, try to boost your investment contribution by the same amount – you’ll never miss that extra amount.
The first goal of investing is to build up enough money to cover three to six months’ worth of salary so that should something unexpected happen, such as medical costs you did not anticipate, you have the money to cover them without derailing your budget and your long-term financial plans.
Unit trusts are a great vehicle for building up such an emergency fund.
Consider investing tax-free
Tax-free investments are available to South Africans of all ages and are accessible in various forms, including unit trusts.
Unlike normal unit trusts, tax-free investment returns are exempt from all local taxes, including income tax and dividends tax, so your returns are not diminished by taxes and the benefits to your financial goals are therefore greater.
This makes for powerful compounding over the years and an important part of any investment portfolio. You can invest up to R36 000 per year, up to a maximum of R500 000 over your lifetime in a range of tax-free funds.
Flexibility around risk
Because you’re younger, you can be more flexible about the amount of risk you’re willing to take when you invest, since you have longer to make up for any periods of market under-performance.
This allows you to invest in higher-risk and higher-reward assets such as equities and listed property, which have the potential to generate significant returns over time.
Avoid trying to “keep up with the Jones”
Getting your first salary or income can be quite a cause for celebration and the temptation to splurge is not easily controlled with all the excitement. But try to remain focused on your investment goals, which can be compromised by spending money unnecessarily or to keep up with other people.
Instead of tagging along with friends to an expensive destination that is out of your budget, a more disciplined approach would be to plan and invest towards an affordable getaway.
The memories may be priceless, but funding a holiday on credit or cashing in your investments will have implications long after the holiday is over.
Financial knowledge is powerful
Spend some time every week broadening your financial knowledge base, which will support your disciplined approach to personal finances and investments. The more knowledge you gain early on, the more you can benefit from it throughout your life.
By being more informed, you’re more likely to make informed financial choices that over time create a solid foundation for achieving your financial goals and building a secure financial future.
Zuhair Allie, Institutional Client Manager at M&G Investments
*The views expressed here are not necessarily those of IOL or of title sites.
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