Our priorities, goals and needs change constantly as we journey through life. Lifestyle choices like cars and holidays occupy and dominate our thinking early on as we start our career, then as years go by imperatives such as renting, buying or building a house come along.
After that we have education for our children, health care for us and our families and all the things that goes with growing families and expanding responsibilities. All the while, we have to keep an eye of the possibility of a comfortable retirement with some form of “financial freedom”.
Juggling these competing financial needs, on a limited and finite income stretches most of us to the core. However, the part of the secret to succeed in these challenges lies in start early, making plans and sticking, as much possible, to those plans. Have you ever heard words such as “financial freedom”, “the freedom fund”, or “the Rule of Seven”? – where you are encouraged to make regular and sustainable savings in pursuing to create a fund which is made up of investments in income producing investments (i.e. dividend paying shares, income-earning cash (i.e. fixed deposits and treasury bills), bonds, real estate’s rental income, royalties, etc) whose ultimate objective is to enable you live a relatively similar life as the one you had when you were earning regular income from your day job during the active career years.
What I am saying is that, you should get into the good habit of saving, early in life. The earlier you start the better, because the small amounts you save – with a compounding effect – turns into large sums over time.
When you are trying to accumulate wealth for future, the longer you have your money invested the more it will grow in value.
The other advantage in starting early is the mindset it helps create. You begin to see savings not as some sort of luxury but as an essential part of your overall financial plan and execution.
Basically, savings should be an integral piece of your planning and seen as important as your rent, or loan repayments or, school fees.
The best way to approach this is to have personal plans and create the budget to support implementation of those plans. If there won’t be conscious and deliberate efforts to ensure all these are put down on paper – then the follow through would also face challenges.
Unfortunately, most of us, approach matters of income and spending via focusing on the short-term, the here and now, where we act as if what is here now is far important to what lies ahead of us not so long down the line.
Because of lack of plans or the habit of putting matters on hold until the last minutes, or according priority to matters that are not, we end up spending money on things that we do not even need or know about.
In this context, getting the basics i.e. personal planning, budgeting and budgetary control is essential.
Earlier [above] I introduced the concept of compounding, in accounting and finance this is a key term, and this is how it works -- let us assume that your savings are kept in the form of bank deposits with a fixed term and your return is interest earnings.
In this case, there will be the effect of compounding interest - meaning that the interest you earn each period is added to your principal and re-invested, so that the balance doesn’t merely grow, it grows at an increasing rate.
It is the basis of everything from a personal savings plan to the long term growth of the stock market. It also accounts for the effects of inflation, and the importance of paying down your debt. What it also means is that the earlier you start savings the better.
Let us assume that you are now in your early 30s and started saving, your chances of getting enough funds, not only for retirement, but also for buying/building a house, taking children to good schools, etc are much higher relative to if you started savings in your 40s where the struggle to achieve financial freedom will be far much higher.
Now, personal and financial planning is key – setting out your goals, setting out the plan to achieve the said goals and prioritizing objectives for executions. But before you proceed with any savings plans, you have to map out your action plan for getting there.
In any case, even if you are in your 40s or 50s, you still have 20 or 10 years before retirement, and there is still quite a lot that can be done. It is never too late to start, what is important is that you have to have a sensible savings and investment strategy, act on it and seek help from financial advisers, when needed.