If you’re serious about securing your future, you need to start by investing in yourself. It’s your first step towards financial freedom.
For many young adults, planning for retirement is not a priority and the thought of investing can be daunting. However, investing in yourself from an early age is how you will build a successful financial future. The younger you start, the more the compounding effect of money over time works in your favour – a little money regularly set aside over a long period will produce much higher returns than a large amount set aside later over a short period.
“Take the time now to learn the basic behaviours necessary to build your financial future,” says Anthony Palmer, Group Commercial Director at Carrick. “For a young person just starting out, it can cause fear and paralysis, but the secret is to start simple and be thoughtful. It is possible to build great habits today that will benefit you for a lifetime.”
If done correctly, the ‘sacrifices’ you make now will enable you to maintain the lifestyle you desire. Here is some advice for those embarking on a wealth-building journey.
1. Invest in your financial education
It’s the starting point to building wealth and sets the tone for your investment success. Knowledge is key to making great investment decisions. Financial understanding will also provide peace of mind around money. “An easy way to start is to read the money and market segments of newspapers to keep updated on happenings in financial markets, or better yet, seek out an experienced mentor who can give you guidance.” says Palmer.
2. Start saving as soon as you start earning
First, set a budget. Work out your income and expenses. Then follow the 50-30-20 percent rule: at least 20% of your monthly income should go towards savings, 50% towards necessities, and 30% towards discretionary items. Setting up a regular, automatic transfer will keep your goals on track and save you time. “At age 30 you should have saved at least an amount equal to your annual income, double that by age 35, three times that at 40, seven times at 55, and 10 times your income by age 65,” says Palmer. “Your minimum goal should be to receive about 75% a year of your final annual salary when you retire.” If you get an annual bonus try stick to that 50-30-20% rule. In an ideal world, save it all, but if you can’t start with using it to pay off debts. Review your budget twice a year to ensure that you are still on track.
3. Set investment goals
Setting goals is a very personal and individualised process. Decide what is important to you and where you want to be in the long-term. Keep it simple and be wary of investments that appear to be overly complex or seem too good to be true. Do the research and only buy investment products that you fully understand. “Don’t let your emotions drive your decisions,” says Palmer.
4. Avoid the debt trap
It’s extremely hard to get out of debt so stay on top of your monthly obligations. “If you have any high interest rate loan or credit, there is no point in investing just yet,” advises Palmer. “It’s better to pay off debts since you’ll be spending a greater amount paying interest on your debt and will struggle just to ‘get ahead’. Make it your sole priority to avoid new, unnecessary debt. Build up your savings first before buying the big temptations. Also, make it a habit to pay all outstanding debt on time and build a good credit record.”
5. Don’t skimp on insurance
Unforeseen life events such as critical illness, a debilitating injury or disability can lead to loss of income and wipe out your savings. There are many insurance options available that provide cover against critical illness, disability, loss of income and death – make sure you get advice and read the fine print before deciding on a product.
6. Plan for emergencies
Set up a savings account to use for special purchases or short-term goals. By making your savings automatic through scheduling regular transfers from your current account, you can manage your monthly cash flow without having to think about it. Build an emergency fund of three to six months of your current cash flow. This is not money that should be invested; it should be kept readily accessible and safe from market fluctuations.
It’s always best to have a qualified and independent financial planner assist you with your savings plan and help you to set and achieve your financial goals. A qualified financial advisor will also be able to guide you through your different life stages and keep you focused on your end goals.