Savings: the earlier the better

Young people have a wonderful opportunity when it comes to financial planning. With their whole lives ahead of them, they can ensure that they will be financially secure when they retire and they can also protect themselves in the time period leading up to retirement. Unfortunately, most of them put off doing so until later in life.

The earlier you start planning for your financial future, the more likely you will achieve your financial goals.

There are two main reasons why it is important to embark on a financial planning journey as early as possible. The first is the power of compounding, and the second is the ease of insurability.

The phenomenon of compounding is often referred to as the eighth wonder of the world. The way it works is that the interest which is earned on an initial investment is added to the original investment. This amount again earns interest and so on – thereby earn- ing interest on interest. The benefit of compound interest and starting to invest from an early age can best be illustrated by an example: If you were to invest a certain amount of money per month for 10 years, then stop investing and just let it grow, you would end up with more money than an investor who started investing 10 years later and invested a greater amount of money for a longer period of time.

When you apply for life insurance, disability and severe illness (dread disease) cover at a young age, you are normally considered to be a low risk and will therefore qualify for a high level of cover at a relatively low premium, unless, of course, you are a smoker! Also, because you are normally healthier when you are younger, you are more likely to be granted cover at ordinary rates; in other words, without your premium being loaded due to health problems.

A final year student approached our office a few weeks ago for financial planning advice. He had an amount available to invest on a monthly basis and understood that the earlier he started, the more his investment would grow over time, due to compounding. He also understood that he would soon be entering the world of employment and wanted to ensure that his life was covered in the event of him dying, becoming disabled or diagnosed with a severe illness. After careful consideration we were able to recommend a suitable investment strategy which allowed him to take advantage of the various tax breaks available. We also managed to obtain incredibly favourable rates of life, disability and severe illness cover. This young man is now on track to achieve most of the financial goals that he has set for himself.

It is never too late to start planning for your financial future.

The sooner you start, the greater the advantage you will have over those who start later in life.

You will also enjoy the added peace of mind of knowing you have done the right thing.

• Rands and Sense - Personal finance for ordinary people is a monthly column by Ross Marriner, CFP® a Certified Financial Planner. His financial planning office telephone number is 046 622 2891