For some of us, the thought of coming up with a financial plan is somewhat like going to the dentist: We delay for as long as we can, often assuming that we can play for time. The reality, though, is that forewarned is forearmed and facing our future head-on while we’re young means we’ll lighten our burden later in life by financially safeguarding ourselves and our families.
So, you decide, one day, or day one?
Here are some key financial decisions to consider when you’re young:
Saving for retirement
Young people often think that their financial priorities warrant a delay in saving for retirement, and many have good intentions to catch up on lost savings later. Alas, when you consider the benefits of compound interest, it’s often extremely difficult to recover the lost time, and even small savings are better than none at all.
Ideally, you should start saving money towards your retirement as soon as you get your first pay-check. When you’re young, you can usually afford to invest more aggressively because time is on your side. That means ample opportunity for growth. Depending on the savings vehicle you choose, you’re also likely to enjoy some tax benefits.
If you’re savvy with your savings plan, you can literally buy yourself an earlier retirement. Sure, it may not sound too appealing now, but when you’re 65 and ready to start a new phase of life, you’ll probably think differently. Moreover, delaying saving means you will lose out on tax benefits linked to certain savings vehicles, and you’re likely to have to contribute much more to catch up.
The graph below shows the difference in monthly contributions for a 25-year-old starting to save for retirement now, versus starting at 35. To get to the same retirement income at age 65, the 35-year old must contribute 57% more each month.
This calculation assumes that income before and after retirement, as well as contributions, increase at inflation and a net investment return of inflation plus 3%.
Wills and life insurance
Getting a will drafted and taking out life insurance are two critical financial considerations which younger people often leave for later. It confronts us with our own mortality – which is not something that sits comfortably with people when they’re young. Again, the reality of life tells another story and you’ll do well not to see a will as an unnecessary administrative exercise; or to see life insurance as a grudge purchase.
After all, anyone who owns an asset or has any debt at all should have a will – regardless of how much money or possessions you have. Dying without a will means you’ll have no say about how your assets should be distributed to your family and how your debt (if you owned a car or a property of any sort) should be managed. Similarly, without life insurance, particularly if you’re a breadwinner in your family or have children, your family may be left in financial dire straits should you die. Buying life cover at a younger age also means that your premiums will tend to be lower, and that you’ll have fewer exclusions.
Sanlam’s recently released 2019 claim statistics show the group paid out R3 251-million in death cover claims in 2018. The second most claimed for category: Accidents; of which 42% were road-related. Suffice to say that an investment in accident and death cover is also highly advisable from the moment you get behind a steering wheel.
Protecting your ability to earn an income
Many of us tend to feel invincible when we’re in our 20s and early 30s, yet it’s almost counter-intuitive, given that our lifestyles often present the highest risk when we’re young and, hence, we are most vulnerable in our youth. Consider the fact that a young person’s single biggest risk is their inability to earn an income. If you’re 25 years old and have more than 40 earning years ahead of you, what will happen if you suddenly become disabled? Add to the mix a scenario of study loans, other debt, marriage and children, and the importance of taking out cover to protect your income becomes obvious.
Last year, Sanlam paid over R329-million in income protection claims and R323.5-million for trauma and injury claims. Most claims from men were for accidents (41%), while women primarily claimed (39%) for joint, back, bones and connective tissue issues. In many cases, these unfortunate circumstances come unannounced, and if you’re not prepared, it means you may not have any income for a prolonged period – aside from a minimal state support stipend and potentially, Unemployment Insurance Contributions (UIF).
When you’re adequately covered and you lose your ability to earn an income, your benefits kick in and ‘pay’ you a monthly or lump sum amount – so you can focus on taking care of yourself and your physical and emotional wellbeing.
Extra TLC if you get seriously sick
Young people do tend to be healthier, so it’s no surprise someone in his or her 20s doesn’t think about extra protection for illness. But it is important to protect yourself and your family should an injury or illness leave you unable to work for a while. If you consider more serious illnesses and know you have a family history of cancer, for example, it may be worth investing in serious illness cover sooner rather than later.
Cancers and tumours accounted for 61% of all of Sanlam’s 2018 severe illness claims, with 31% of women’s cancer claims being for breast cancer. Although breast cancer mostly occurs in women over 50, it can be a risk for women younger than 50 too, especially those with a family history of the disease.
If it all feels rather overwhelming and you’d rather not ‘adult’ today, think again and make a qualified, reputable financial adviser your BFF!