There is no right time to start saving and investing but the only bad time to start investing is ‘later’.
If you are in your 20s and do not get paid enough to spend recklessly, then saving and investing will probably be your last avenue. However, those who are insightful about the privileges of early investing can have the financial upper hand over others by enhancing their earnings and achieving greater financial objectives over time.
If you spend everything that you earn, you can never earn better. It is important to save a part of your salary or income for emergency purposes or to achieve bigger financial objectives without debts. Investing the saved money into a suitable capital market is equally important to augment the savings.
Investment in the right instrument will not only fight against inflation but will supplement your financial income to achieve bigger financial objectives in the future. Following are the major reasons why you need to start saving and investing as soon as possible.
- Protect Your Money Against Inflation
The rate of inflation is the rate at which the money loses its buying power over time. If you save a small proportion from your earnings and keep it as cash for a prolonged period, you may diminish its buying power.
It is important to invest the saved amount in a capital market where the returns are higher than or equal to the inflation rate in order to enhance or maintain the buying power of the money respectively. The inflation rate is not constant and depends on various economic factors.
The inflation rate in South Africa for the year 2019 was 4.13% while the same in 2016 was as high as 6.34% whereas in 2020, it dropped to 3.2% in November 2020. If the rate of annual return is lower than the rate of inflation, the buying power of the invested money is getting degraded.
- Grow your Money with Compounding Interest
The power of compounding can play a vital role in turning your savings into phenomenal wealth. Compound interest can be simply called interest upon interest. In other words, it is the interest that is gained upon the principal amount that has been already increased by the interest of the previous period.
A wide variety of investment tools are available in South Africa that offers compound interest on the invested amount. A monthly investment of R1 000 for 20 years can become more than R1 500 000 if the rate of compound interest is 15%. Compound interest is one of the major reasons why you should start investing as early as possible.
The longer you stay invested the more benefits you can grab through the power of compounding.
- Make Your Money Grow and Work for You
Starting to save and invest at an early age can provide vital financial assistance at every stage of your life. The saved and invested money along with the interest gained over it can be quite helpful if you utilise it productively. If you make the right investment decisions and take all the rights steps, then you can earn consistently without even working.
Your investments will work for you and will deliver profits if you start saving and investing at an early age. While you earn through investments, you are not bound to work for money and can follow your passion or enjoy doing whatever you want.
- Starting at Early Age Allows More Saving & Better Returns
Starting to save and invest at an early age promotes financial discipline and embarks a habit of saving among youngsters. The reasonable expenses at this age are lower which allows you to invest more and gain more from the investments over a longer period.
Since the investment can be done for a longer tenure, the compound interest can be well utilised and the young investors can gain better returns with smaller investments. Young investors have the ability and opportunity to take a high risk to gain high returns and can invest for a long tenure.
- Supplement Your Income by Acting as Secondary Income Source
If you are employed and have a secured source of regular earnings from a job or business, it is well and good. Although, it is always good to have a backup option for emergency financial requirements or in case your primary source fails to deliver regular income. Investment in a suitable financial market can act as a secondary source of income and allow you to earn extra income apart from your regular source of income.
- Gain Financial Independence and Security
If you are investing for a long period and have built decent wealth over time, you don’t need to be financially dependent on any person, job, or income. Many young people settle for an unwanted job or business because they are financially dependent on it and cannot move out.
Savings and investments can help in gaining financial independence, and allow you to explore more opportunities to grow without worrying about the financial requirements. You don’t have to rely on salaries and will have financial security if the investment is started at an early age.
- It Can Help you in Achieving Financial Objectives
Those who invest at an early age have better financial growth opportunities compared to those who don’t. The returns can be reinvested into more productive elements, start a business, buy a house, or fulfil any other financial objective while leading a debt-free life. Achieving an objective becomes more convenient if the investment is done specifically for that purpose. Each type of financial instrument has the ability to deliver different returns and carries different risks. Once the objective is predefined, the selection of instruments and the capital market can be done accordingly.
- More Savings and Investment Options Are Available at Young Age
If you are in your 60s, you cannot take the high risk or cannot invest for the long term as you need to fulfil your necessary financial requirements. In your 40s or 50s, more investment options are ideal for oneself. However, if you are starting your investment journey in your 20s and 30s, you have the widest variety of suitable investment options.
This is because young investors can stay invested for the longest amount of time and take high risk to achieve their financial objectives. The younger generation may lack experience but they can make better use of the available tools and features online and have the widest range of opportunities. Budgeting apps such as 22seven, Monefy, Mint app, Goodbudget, etc can be quite useful in calculating the income and expenses.
These applications can be quite helpful in making strategic financial plans and make investment decisions. In South Africa, a large number of investment options are available to investors. The instruments mainly include mutual funds, ETFs, stocks, derivatives, forex trading, cryptocurrencies, etc. Each instrument carries a different risk factor and has the ability to deliver different outputs.
Potential South African investors can invest in stocks, ETFs and derivatives through JSE licensed brokers. Investment in mutual funds can be done directly through websites and apps of fund houses. While to invest in riskier instruments such as forex and CFDs, you need to open an account with any of the reputed forex brokers in South Africa which are licensed by FSCA for offering derivatives.
You must check the risks of the instrument before you invest, as they may not be suitable for you. Some instruments are only for experienced investors.
Important Points to Ponder Before You Start Investing
- Make a budget and figure out the amount that you can allocate for investments.
- Check all your financial needs and liabilities and plan accordingly.
- Keep emergency funds for any unwanted calamity.
- Select the financial market according to your objectives and risk-taking ability.
- Read and learn about all the risk elements involved in the chosen investment tool.
- Select a trustworthy and reputed broker/dealer.
- Do not touch the unknown in the financial markets.
- Do not get greedy or afraid after the initial outcomes of your investment.
- Invest with virtual currency in demo accounts to gain experience before making actual investments.
