Mon | Jun 14, 2021

Oran Hall | The ‘period of firsts’ in the investment cycle

Published:Sunday | May 23, 2021 | 12:11 AM

QUESTION: I am a recent graduate and just started my first job. I am interested in building my wealth, and as such, seek your help/advice in putting the best plan in place to accomplish my goals. – Beavers FINANCIAL ADVISER: For most first-time...

QUESTION: I am a recent graduate and just started my first job. I am interested in building my wealth, and as such, seek your help/advice in putting the best plan in place to accomplish my goals.

– Beavers

FINANCIAL ADVISER: For most first-time graduates, this is the early career period of the life cycle – the period of firsts: first job, first car, first marriage, first child, first business, and first opportunity to ‘pay yourself first’.

Begin by making a personal plan. In fact, it is hard to see how you can have a financial plan without a personal plan to guide your decision making. Decide when you want to achieve specific goals such as purchasing a car or pursuing further studies because it will have implications for how you arrange your financial affairs.

Developing the savings habit is a sure way to build a sound financial future. Savings are important to generate funds to meet such needs as building an investment portfolio, the provision of shelter, retirement, and further education. Saving early and systematically reduces the need to find large sums close to the time when important needs are to be met.

It is true that the returns on savings are minimal, but it is also true that the commercial banking system is not the only depository for savings. Money market unit trusts are a reasonable alternative.

Budgeting can be a useful tool for boosting savings. The earlier savings start, the better, as the power of compounding is better able to show its benefits and the greater the pool of funds that can be generated for investment.

In your spending plan, account for all of your income and expenses, and let savings be a fixed portion of your income. To make it easier, open an account at a financial institution, and arrange for a direct deposit to be made by your employer, if possible.

Be frugal. Monitor your spending plan. It will take some effort at first but will get better. Remember to establish an emergency fund. You are responsible for yourself now. Put those funds into an account that earns interest.

If your employer has a formal pension arrangement for employees, participate fully by making the maximum contribution. It is not taxed as income, and the income it earns in the fund or scheme is not taxed. Employers generally match employee contributions. Make the most of other benefits offered by your employer as this may improve your ability to save.

If you are in the right place, you may get a bonus periodically. That is a good thing to save, and when you get a raise, save that, too. Remember, you are being frugal and are building a solid foundation for life.

Start your investment programme. You do not have to start big. Get to know the available instruments, and invest time in learning about available strategies.

Remember that you are ultimately responsible for your financial well-being and the decisions on which it is built. Put yourself in a position to understand when a financial adviser speaks or writes to you.

Develop the habit of diversifying investments to spread risk but also to enhance the prospects of getting reasonable returns. With a good understanding of how the markets operate, it may even make sense to invest in instruments that have the capacity to generate capital growth.

This is the beginning of the accumulation phase of the life cycle, so you should consider investing in some instruments capable of appreciating in value. Start with capital growth unit trusts or mutual funds, but you may invest in ordinary shares as you gain more experience and accumulate more funds.

Avoid debt, but if you must borrow, do so to improve your capacity to increase your net worth or to purchase items that have long-term use and value. Eschew the use of borrowed funds for pleasure. If you do borrow, pay your debts and build an excellent credit score.

This is not the time to acquire your dream possessions. Buy what you can afford, whether by cash or by debt. The big things will come later.

Your willingness and ability to save are key to your ability to create wealth as savings provide the resources needed for investment. Recognise that you will not always get the returns you hope for, but do not let that deter you. Be patient. It generally takes time to build wealth.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and