What Is The Right Age To Start Saving?

If like me you are an avid reader of all matters to do with personal finance, the cartoon (see below) of a toddler fretting over his lack of savings is a hoot. I simply loved it! But beneath the humour lies a deeper question that all of us ask ourselves at some time or other: “When is the best time to start saving money?”

Usually the typical Kenyan goes through his/her twenties thinking “Am too young to worry too much over the lack of savings” and then find themselves in their mid-thirties, kids and mortgage to boot, and thinking “My paycheck is too stretched to be able to save anything”. Then on to the fifties when the kids are through with school and retirement looming large then the thinking changes to “I wonder how long my pension savings will last me before i have to depend on my kids”. Now this obviously is not the case for all Kenyans but describes a general path travelled by many especially those who depend on a paycheck all their lives.

In my own case I hardly gave a thought to savings through my twenties on the basis that I really couldnt be expected to save anything on the kind of money i was getting from my employer. Although the money was indeed not anything to write home about, I had few fixed expenses (rent and food) and I even managed to buy my first car on the same meagre paycheck. As i moved jobs my pay kept on rising but i saw no urgency in getting started on savings. Soon enough the big three-Oh came and passed and yet i still had no savings and no worries. However, it was beginning to dawn on me that my dream of being rich had a very real chance of going up in smoke unless i hit on a big business idea fast. Although i had no problems with a middle class lifestyle, i wanted a life of financial freedom. Thankfully, in my thirties i realised that, big business idea or not, i could still attain a life of financial abundance thanks to the time-tested concept of “getting rich slowly”. The more i read up on the subject the more convinced i got that indeed this was not only viable but could also be attained before i was too old to enjoy my money. Obviously, the key plank in the “get rich slowly’ school of thought is the idea of saving and investing regularly and i embraced the saving culture with zeal. Looking back, i wish i had started earlier but the question is, when is the right time to start saving?

An interesting piece on CNN Money shows a chart depicting the difference in networth between someone who starts socking away money at 25 and one who starts ten years later at 35. Each of the individuals saved a $400 monthly except that the guy who started at 25 saves the money upto age 35 then stops and leaves the money earning a 7% return till the age of 65. The other starts at age 34 and saves the same amount of money from age 35 to age 65, same 7% return. The first guy (lets call him “Early Start”) amazingly has a higher networth of USD 602,559 at age 65 compared to the other fellow (“Late Start”) who has USD 528,222 at the same age. Considering that Early Start only saved for 9 years and then let the power of compound interest do the rest, it is a very strong case for starting early.

Now in Kenya, most 25 year olds are just out of college and earning minimum wage. Add to this the fact that the priority for most at this age is to acquire some sort of “life” for themselves meaning purchasing a car, buying some furniture, paying back their HELB loans and for others supporting their parents and siblings. I found that it was easier to save when i had acquired most of the furnishings and furniture for my house plus a car as it reduced the pressure on me to “spend spend spend”. However, it would still be a good idea to contribute fully to one’s pension scheme at whatever age as the money is deducted directly before one receives their pay. In addition, one should try and save even the littlest amounts starting from the day they receive their first payslip.

I find the chart so inspiring. Is there a better time time to start than now? After all, they say that “Where there is a mountain to climb, dont think that waiting will make it smaller“

Early Start

Money Advice for Twenty Something Year Olds

Jane Kui writes in as a follow up to my post about the “Fundamentals of Wealth Creation” and asks a question that many in her position ask themselves a lot:

I would like to know how to go about saving, being a student in my final year in campus. This is because it gets difficult to save when the little cash am given is meant for my upkeep in a month and the same amount i want to save

First and foremost, I once again take the opportunity to reiterate the disclaimer contained in my “About” page and state that:

• I have no financial training or profess any expertise whatsoever
• I do not work in the field of finance or related trade
• My blog is merely a record of the things I have done to manage my finances
• The methods mentioned in this blog may not work for everyone
• The services of an expert should be sought where necessary

Now that we have that out of the way, I would like to thank Kui for writing in as the purpose of this blog is to share our experiences with money management and wealth creation, no matter our circumstances. Having been in Kui’s shoes a few years ago when I was also in my final year in campus, I can quite understand her particular set of circumstances. To be honest, am quite envious that Kui has managed to advance that far in her money management skills as to actually think of saving money while still a student. I can safely attest that I had no such thoughts during my live-and-let-live campus years and I think Kui will go far. I wish i had also spared a few minutes to advance my knowledge of personal finance at that age. Maybe I would have done a few things differently.

Now saving money presumes that one has some money that they can actually put away after meeting all their expenses. Such money is usually some sort of income whether from a salary or from a business. It would be a stretch to treat monetray support from parents as income but that is not to say that one cannot find a way to save even while on an allowance. It is all a factor of one’s living expenses and how one manages them. For many university students, having a TV in their room, an iPod or MP3 player, wearing the latest fashions or going out three or four times a week is a necessity and they will gladly shell out money for these expenses. It should not be assumed that all university students are barely meeting their most basic needs and can only afford a few meals and the most basic of clothing. Clearly, a student who chooses to forego the “luxuries” such as the iPods and latest sneakers can indeed have some money to set aside even if only as an Emergency Fund. That notwithstanding, I do know of many of my college mates who were actively buying stocks in the Nairobi Stock Exchange, although I, unfortunately, remained totally ignorant of the benefits of such activities at the time.

So in a nutshell, I would say that saving while surviving on an allowance from ones’ parents is a factor of how simply one chooses to live and, obviously, the level of support received from ones’ parents. That notwithstanding, Kui is a final year student and soon to be thrust into the world of employment and real responsibility. Presumably at this point, monetary support from Kui’s parents will cease and she will be responsible for her money and future wealth all by herself. I therefore wish to set down a few pointers that i have learnt along the way in the time since I was also a student like Kui. Hopefully these tips will serve Kui, and other twenty something year olds in good stead in the days ahead.

Tip #1: Lay a solid foundation now

You will probably never be as poor as you are in your twenties again. The lessons you will learn in the area of frugal living will serve you well if you decide to keep them up as you get into your first job and your first paycheck. The mistake that most make is to immediately get caught up in the trap of lifestyle inflation and increase their expenses as their income goes up. Make a decision to live as cheaply as you can for as long as you can. This will enable you pay off your student loans and accumulate savings early on in your career.

Tip #2: Learn to differentiate the Needs from the Wants

Most of us make the mistake of failing to distinguish our Wants from the things that we actually Need. As an example, food is a Need while Pizza is a Want. A TV may be a Need but a 37 inch plasma screen is definitely a Want. Use your income to meet your needs (food, rent, clothing etc) and keep your Wants in a wishlist until you can either afford them or save and pay cash for them.

Tip #3: Dont pay interest on depreciating assets

Upon employment, bank sales agents will bombard you with ‘affordable unsecured” loans to meet your every desire from furnishing your house to buying your first car. Remember that those things that you buy lose value the moment you possess them and continue to do so at an alarmingly fast rate. The brand new TV will be worth less than half its purchase value if you decide to dispose of it later. Take loans (if necessary) to invest in things that actually bring a return such as starting a business.

Tip #4: Always look for opportunities to boost your income

Your ability to create wealth will be very much determined by how much income you are able to rake in. Although you may earn very little early on in your career, always seek opportunities to increase your earning potential, e.g by going back to school to increase your skills or by starting a business that can bring in extra income. Even when in campus, many students engage in money making ventures e.g offering private tuition etc to bring in some much needed extra income.

Tip #5: Take advantage of the tax benefits in Pension schemes

This is a mistake i made early on by not joining a voluntary pension scheme offered by my employer since i thought i earned too little. This meant that i missed on the opportunities available to save on PAYE by failing to contribute. Many young people also withdraw and use their pension contributions when moving jobs. Dont do this! I like the RBA advert that has a 24 year old saying that she is “on the fast road to retirement” at only 24. This tells you that its never too early to begin saving for your old age.

Tip #6: Take advantage of the power of compound interest

Albert Einstein called compound interest one of the world’s greatest forces and for good reason. By starting small very early on in your career and letting compound interest do its magic, you could save a considerable amount of money during your career and even possibly retire early. Use this calculator to see how even small amounts saved over long periods of time can blossom to tidy sums in the long run. Experts advise that the younger you are, the greater the risks you can take so dont be afraid to take well calculated risks early on in your life. If you make mistakes along the way, you will have sufficient time to make them up. Investing in the stock exchange is usually considered a volatile and risky venture but in the long run, the returns outweigh most of the other investment options.

Tip #7: Have an emergency fund

Even with your minimal living expenses, it makes sense to have an emergency fund that can cater for those unforeseen expenses that are sure to come. These can cater for such expenses such as rent deposits that are the bane of many young people. Having such a fund will ave you from having to resort to expensive bank loans or worse, shylocks

Tip #8: Track your expenses

Although this applies to persons of any age or stage in their career, it is important for a young person to incalcate the practice of tracking their expenses from very early on. This exercise will show you what your mandatory expenses are and wenable you to see what is available to save and invest. Failure to do this will lead you broke and living from paycheck to paycheck no matter how much more you evenntually earn as your career progresses.

Tip #9: Dont try to keep up with the Joneses

For many young people, the period after leaving school involves a lot of conversations about “who works where” and ” who is now earning what”. As sure as the sun rises in the East and sets in the West, there always will be your peers earning more than you and others earning less than you. Trying to keep pace with the freespender from your class who got a job with the United Nations is a sure recipe for financial disaster. Develop your own financial plan and stick to it. The fruits of this will be there for all to see in due course.

Tip #10: Dont expect too much too quickly

A common mistake with many young people is to expect their careers and earnings to start high or progress quickly. Wanting to own a BMW is all well and good but it is important to remember that the people driving around in these beautiful beasts have worked long and hard at their careers for upwards of ten years to get to where they are. Work with the money that you have, however little. At the same time, work hard to increase your income and plan your career well. In the fullness of time, the things you desire will come to you

Most of all, i would advise young people to enjoy their youth as much as possible. Having fun and managing money responsibly are not mutually exclusive and one can enjoy the things of young (partying, hanging out with friends etc) and still manage to stay on the road to wealth. Do not deny yourself these things in the name of saving for retirement but remember, its never too early to start taking responsibility for your financial future

Are You Likely To Be Rich?

I recently came across an interesting quiz that brought home all the fundamentals of creating wealth that i wrote about in a previous article on MyRoadToWealth.

The True/False questions asked were:

1. If asked how much money you have in your bank account right now, you would know? T/F
2. You pay off all your credit card bills in full and on time? T/F
3. When you save money on one thing you stash it, instead of splurging on something else? T/F
4. You keep track of your savings and spending? T/F
5. You have a budget and stick to it? T/F
6. When you see something you like, you stop and think, do I really need this? T/F
7. You rarely purchase things you don’t use? T/F
8. Your monthly spending is less than your income? T/F
9. Your bank and credit card statements are never a surprise? T/F

If you answered 6 or more questions true then you are well on your way to riches, but if you answered more than 3 questions false then your finances need some attention.

Excellently captured! I would however have added a few questions of my own:

10. You keep an emergency fund to tide you over in case of unforeseen events such as sudden job loss? T/F
11. You constantly seek new ways to boost your income through salary raises or business ventures? T/F

These few questions, although not exhaustive will enable you to evaluate whether you are on the right path towards financial freedom. A year or two ago, i would have scored very poorly on this quiz. But due to the influence that reading personal finance blogs and books has had on me, I can now confidently say that I have a good chance of finding financial prosperity in the days ahead.

How did you fare on the quiz?