Financial considerations you may think you’re too young for, but aren’t
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 li