When we start our work career we are excited about many things. It is probably one of the most exciting, yet scary, times of our lives. Who can forget the feeling of receiving your first pay check and the feeling of independence that comes with it? Emotions are overwhelming as responsibilities set in. I remember when I started out as a clerk at Ernst & Young my income was just about enough to cover all my living expenses. Luckily it was compulsory to contribute to the company’s pension fund as I sometimes wonder if I would have saved anything for retirement if it wasn’t for that.
The reality today is that only a small amount of employers, and generally the larger corporations, offer a compulsory pension fund. This means that your only way of saving for retirement, or other long term goals, is dependent on you making some difficult but good decisions.
Many young career starters today argue that retirement is 40+ years away and they still have ample time to start a savings plan. Whilst it is correct thinking that 40+ years is a long time, there is a lack in knowledge and understanding of the effect of compound growth and how a 40+ years savings plan can take so much stress away from the latter years before retirement. Compound growth is best described as growth on growth much like the snowball effect. A snowball increasing the surface with every roll and the longer it rolls the exponentially larger it gets. When it comes to a long term savings plan, like your retirement savings plan, you want to maximise on investment gains. Investment gains are essentially the compound growth part of your investment. If you start later in life and should you be able to fulfil your objectives, then it will cost more own contribution from your side and less investment gains, as provided by the growth of a well-balanced and actively managed portfolio. Please see the chart below to illustrate the effect of starting early and the lower amount of own contribution required to meet the same objective:

I am often asked by younger clients what are the most important financial planning priorities for a 20 – 30 year old career starter and here is my response:
1) Securing medical aid – medicine is expense when the unexpected happens and believe me you don’t want to queue at the casualties department of a state hospital
2) Saving for retirement – we recommend that people save at least 10% of remuneration, but 15% would secure comfortable retirement. A more aggressive approach is advised.
3) Securing disability insurance in the form of an income protector that will pay you a monthly income in case you can’t work any more
4) Pay off your study loan – where applicable. Many students today have a study loan to repay and dependent on the interest rate the level of priority might change. Credit is not always a bad thing but it must be accompanied by a plan and not repaying your student loan whilst not saving is
5) Life insurance – especially for young married career starters. Life insurance becomes more of a priority as you have a family that is dependent on your income
6) Short term cover for assets
7) Emergency fund – we always advise clients to have an emergency fund with at least three months’ salary value. An access bond or a call account linked to your bank account are easy ways to setup a solution.
8) Saving for a deposit on own property (future primary residence).
9) Ensure a valid will in place
10) Budget planning / spend tracking – it is important to be fully aware of your expenses and this can be tracked using a spend-tracking app linked to your bank account.

Sound financial planning for career starters is the foundation for building long-term wealth. It is critically important to start the discipline of obtaining financial advice and to engage with a qualified financial planner from this life stage in order to fulfil your objectives, and when it comes to savings you have to utilise compound growth or investment gains.

By Hendri de Klerk