PERSONAL FINANCE: How early should you start investing?

It’s nice to have a decent steady salary at last. Now it’s time to think about what to do with that income. For most young people, the idea of saving and investing seems like a lifetime away; most people don’t start thinking about saving or investing for their financial future until they are well into their 30s and even later. It is important to realize that the choices you make in your twenties as you start to earn play a critical role in your future financial security.

Build your knowledge of investing

Investing successfully has much to do with knowledge. Unfortunately, personal finance is not part of the curriculum in schools and colleges and young people step out into the real world for the first time without the skills and knowledge to manage the money that they earn. Indeed, they are just trying to acquire the most basic financial skills when they need them the most.

Many young people ignore the financial papers and as a result, they do not get to learn about investments or money. Whether you take professional advice or not, you need to educate yourself about money matters and become “financially literate.” Enhance your knowledge by reading; there is a plethora of information out there, in newspapers, books, magazines, and on the Internet.

Establish your short, medium and long-term goals

The first step in financial planning is to identify your goals. Your short-term goals might include: Going back to school, planning a wedding, buying a car, or taking a vacation. Think about medium-term goals, such as, owning your own home and financing your children’s education, whilst your long-term goals may include planning for your retirement.

Live within your means

It is very tempting when you first start earning, and particularly where you have few financial responsibilities, for you to spend excessively on mobile phone bills, clothes, accessories, gadgets and entertainment. Critically review your income and expenses and create a budget so that you can see exactly where your money is going and then make adjustments where necessary.

Manage your Debt

Once you start earning a regular salary, you are likely to have access to some credit. Be cautious about borrowing; it is better to borrow for things that have lasting value such as your education or your first home rather than for consumables such as the latest smart phone or clothes. Start to build a solid credit history from now by paying your bills on time and systematically reducing any expensive debt. The way you handle your debt from now will be important when you need to borrow more significantly in the future.

Pay yourself first

Most young people feel that they don’t earn nearly enough to even consider saving. Regular investing is the key to building lasting wealth and even small amounts add up surprisingly fast if you invest on a regular basis. Even when money is tight, try to save at least 10 percent of your monthly salary. 

Your aim should be for you to have enough cash to cover at least three to six months of your expenses so that you have something to fall back on to take care of unexpected expenses such as car repairs or other bills. These savings should be kept in certificates of deposit or money market accounts to meet short-term goals such as buying your first car or planning towards your wedding.

Start investing to meet your goals

What will you do with your money? Will you start a small business or commit to buying a small plot of land? Have you been thinking about investing in stocks but don’t quite know where to start? Perhaps you don’t have the time or know how to select your own stocks and don’t have that much money to spare. If you are young and do not make much money but want to start investing, a stock market mutual fund may be the ideal investment to meet your medium and long-term goals.

Mutual funds usually set relatively low minimum amounts for initial and subsequent subscriptions. In Nigeria, you can invest from as little as N10,000 which makes it affordable for smaller investors. Historically, the stock market has out-performed any other type of investment over time, but it should be considered carefully as it comes with greater risk.

It is important to spread your investments over different asset classes, so that a loss in a particular investment may be minimized by gains in another. Mutual funds offer such diversification and help you spread your risk. Buy into an established scheme that has an experienced fund manager and good performance record. You need more knowledge and usually a larger amount to invest directly in stocks and still build a diversified portfolio to reduce your risk. But, whether directly or through mutual funds, the important thing is to get a large portion of your investments into the stock market as early as possible as you have the time to ride any short-term volatility.

Start planning for your retirement

It may seem odd to talk about retirement when you have barely got started with work. Naturally, you are more concerned about your job and not the end of your working life eons away. As soon as you start work, you will be eligible to contribute 7.5% of your pre tax income to a Retirement Savings Account (“RSA”) with your Pension Fund Administrator (“PFA”) this will be matched by your employer. You have an edge if you start to invest regularly for retirement from now. Setting up automatic contributions to either one of these retirement vehicles at a young age will help you build wealth effortlessly.

The luxury of time

When you are young, you may not have much in the way of income or assets. However, you do have one of the most valuable resources at your disposal. That resource is, time. The day you start earning is the day you must start to save. At this time, you tend to have fewer financial responsibilities; once you start raising a family, responsibilities and expenses begin and that can be a challenging time for most young families. But investing a significant part of your earnings from the start gives you an advantage of a few years.

One of the greatest failures of investing is procrastination. If you are consistent and disciplined, your savings will be able to grow considerably. The financial choices you make now, will largely determine your quality of life in future. Time is on your side; so start now.