I am 25 years old and would like to start saving for retirement as soon as possible. Would you recommend that I pay off my debts before I start saving?
It is important to repay expensive debt as quickly as possible. But even more important is making lifestyle adjustments so that you avoid taking on more debt. Financial lifestyle mismanagement (living beyond one’s means) is the single biggest cause of financial failure.
Before you begin saving, set up a monthly budget to keep track of where your money goes. This will help you to find ways to do more with it. Maintaining a budget is the key to reaching your personal financial and life goals. Include your outstanding short-term debts, such as personal loans and credit cards, and work out how to repay this debt as quickly as possible. If you are paying off a mortgage, ensure that your home will be fully paid for by the time your retire.
Once you have repaid expensive debt you can begin saving for retirement and other goals.
The sooner you begin saving for retirement, the greater the potential for your investments to produce the results that you require in order to retire. In a nutshell, the earlier you start investing, the more time your investments have to appreciate in value due to the effect of compound growth. Albert Einstein is reputed to have called compounding the 8th wonder of the world. Compounding is when an asset has generated earnings, which are then reinvested in order to generate their own earnings. So while small contributions may not seem impressive at first glance, they enable investors to adopt the habit of saving, and can really add up over the course of a lifetime.
To illustrate the power of compound growth, take a 25-year-old who invests R24,000 a year for eight years until age of 33 and then leaves their investment to grow until age 65 without any further contributions. He or she will earn more by age 65 than a 35-year-old who invests R24,000 a year for 32 years – even though the 35-year old invested four times as much.
