MANILA, Philippines – Retiring in your 60s with a million pesos or more largely depends on how much you put away in your 20s. Time starts off with abundance, but you can never get it back. Before you know it, you may find yourself wishing you had invested in retirement sooner.
Dining out, vacationing and expensive gadgets may cause young professionals to be living paycheck to paycheck. Some bump off plans to invest in retirement early, holding on to the possibility of hitting the lottery or building a multi-million-peso technology start-up in a year or less.
But the reality is, time is not a limitless commodity and it is always better to start investing as early and as much as you can. Rappler spoke with Marvin Germo, a registered financial planner and the author of the Stock Smarts: Winning Strategy for Investing. Here are his tips for 20-something professionals, or those who want to get retirement investment off on the right foot.
1. Create a budget compass and live by it
Have your monthly salary mapped out. "First, know how much is your disposable income on a monthly basis," Germo said. "A portion of your salary, of course, should cover the basic needs, like transportation and food; and the second one should be to pay off debts if you have any."
The budget should act like a compass, guiding you through important financial decisions and commitments. This includes "renting an apartment, buying a car, going on a European vacation or switching jobs," he said. After all, you are better off with a budget than a toss coin.
2. Stock a month’s worth of expenses
A month's worth of expenses can cover emergency costs like having your laptop fixed, said Germo, who is also an entrepreneur and an international resource speaker.
"Once you've stocked that money, focus on the next goal: 6 months of expenses should you lose your job. Until you've reached that amount of liquid savings, investing is not a top priority," Germo added.
3. Create more streams of income
“You might say you’re just a 20-something who’s earning around P20,000 ($450.41) a month, making it hard for you to invest,” Germo said. “If that’s the case, create more streams of income.”
“This is the best time to create more sources of income, save up and invest because you have [fewer] responsibilities than several years forward when you have a mortgage to pay and a family to feed,” he added.
Your alternative sources of income, according to Germo, could range from working overtime to setting up a part-time business.
“When I was in my 20s, I spent some of my weekends doing overtime work so I won’t be tempted to party, dine out or shop. Instead, I stocked away my extra money and used it to set up my own part-time business,” he shared.
4. Invest now, be an expert later
Investing in stocks may feel like jumping into the deep end. As an investor, you should not be scared of the risk attached to each investment, but your goal should be to study the risk, see if it fits you, and find ways to work around such risk. "But saving at all matters more than choosing the best mix," Germo said.
"For example, you put 6% of your monthly salary, with a 3% match starting 23. You earn a lousy 2% for 10 years and then adjust your portfolio so that you earn 6% for the next 30 years. The rocky first 10 years will still add 47% to your total wealth by the time you reach 65 years old," Germo explained. "At this stage, get the help of a financial consultant and be an expert later."
5. Go ahead, indulge in a latte
Reducing small expenses like a tall Java Chip at Starbucks will not hurt, but housing is where you can really save money when you are young. “Renting a two-bedroom apartment with a roommate is 50% cheaper than a one-bedroom unit,” Germo shared. "Enjoy small things like Starbucks coffee, but in moderation."
6. Invest in yourself
“Most professionals get their highest raises during the first 10 years of their career. So lay down the foundations for salary growth early and invest in yourself,” he said. “Don’t be afraid to spend a huge portion of your savings for a web design course or a business communication class."
A P30,000 ($675.61) course that leads to a raise and promotion could pay off in compounding returns throughout your career, as future raises on top of your higher base wage. "It is literally the best investment any 20-something will ever make: education," he said.
For 20-something professionals who just started building their careers, retirement may seem like a far-away concern. But if you want your sunset years to be spent on playing tennis and doing the things you want when you have all the time in the world, start saving up for retirement now.
After all, the early bird gets the better retirement. –Rappler.com