Here from the future: Financial advice to your younger self
If you could look back, and talk to your 20-year-old self about financial planning, what would you say? Would you tell yourself not rob the both of you by putting off saving? Would you tell yourself to change your financial thinking? Would you tell yourself to forego the nifty expensive car and instant gratification, for something more affordable and financially sustainable?
With Generation X-ers now aged between their forties and fifties, they should, by rights, be well into a solid section of their financial planning timelines – and while the technology has become increasingly exciting- there are always some basic financial concepts that never change in their fundamental importance.
Shaun Levitan, executive director at Colourfield helps us showcase financial advice that an older person might give to their younger self.
Change your thinking, re-focus your objectives
Traditional retirement thinking works on the concept of saving and investing enough over time to maximise a ‘pot of money’. However, we prefer not to focus on the pot of money analogy but rather to think in terms of an income stream that will be sufficient for your needs during the retirement years. We use investment technology that focuses on being in a position to meet your goals in retirement (so called goals-based investing) rather than treating retirement provision like a bank account.
It’s never too soon to start
Ideally, you should start saving for your retirement with your very first pay cheque, during your twenties. Starting to save in your thirties, or later, means that you will have to put away more of your take-home pay every month than if you had started saving a decade sooner. The power of compound interest over decades means it is easier to reach your retirement goal by starting to save smaller monthly sums of money in your twenties than by starting later and then saving larger monthly sums.
Compound interest refers to the situation in which you are earning interest on your interest. It represents an incredible force in saving and investing towards a long-term goal. No matter what financial innovations are introduced, compound interest still represents the most powerful tool in any investor’s toolkit. The earlier you start, the less of your disposable income you have to give up later during your working life to fund your retirement goal. It certainly helps if you can start in your 20s. However, don’t despair if you didn’t start at this age. As the saying goes, ‘The best time to plant a tree is 30 years ago; the next best time is now’.
Re-think that brand-new car
When we are younger we are often very materially driven. The excitement of our new regular earnings can encourage us to spend money on items that will bring us instant gratification – like an expensive new car, for example – but that won’t sustain us in later life. While it’s true that access to transport in South Africa is important, you can, as a young person, make the decision to drive an older or smaller, more affordable car than the more glamorous vehicle on the show room floor that is making your heart sing. By driving a more affordable car that won’t break your income every month, you can spread out your assets and allocate some of your monthly savings towards a decent level of retirement saving and investing. The same advice about the car goes for the newest cell phone, sound system or flat screen TV.
Work out a budget
There are ways to work out how much you need to save for both short-term and long-term needs using online calculator tools. As mentioned previously, we prefer to stay away from the idea of saving towards a particular pot of money. Nonetheless, there is still value in doing a certain amount of quantifying and this is where making use of calculators can be helpful. It’s always valuable to start with a simple budgeting exercise. How much income do you earn every month and how much money do you need to spend on your obligations?
Knowing the numbers in a simple budget equation is a good start to becoming solvent and secure in both the present as well as the future. Then measure your retirement savings to date at different times in your life to see if you are on track to financial solvency.
There are many people working today who are unfortunately behind on their retirement planning time-line. These are the people who need to play catch-up with their retirement savings. In such instances, best practice advice today is as follows: firstly, do your best to reduce your non-essential debt to the bare minimum. This includes credit cards, retail store cards, personal loans, overdrafts and hire purchase agreements. Secondly, see a financial adviser who can go through your own unique circumstances and help you to come up with a monthly plan.
“Times are tough at the moment, with consumers feeling the pinch and economic belts being ever tightened. It can seem very disheartening trying to save today for a still far-off future. The temptation will always be strong to put off retirement saving in the immediate present for issues that seem to be more pressing.” concludes Levitan.