Many people miss out on the benefit of investing their earnings early. What can 20-somethings learn from Actuarial Analyst Christopher Smith, whose money mindset and investment strategy are paying off?

“My father-in-law, with his keen financial insight, gave me a crucial wake-up call,” reflects 25-year-old Christopher Smith, an Actuarial Analyst at Discovery Invest. “He pointed out that the percentage of a salary most people save or spend often remains unchanged, even as their earnings grow. With rising debts and increasing living costs each year, it becomes difficult to stay ahead.”

Smith has been refining his financial expertise at Discovery Invest for nearly three years. His studies in Actuarial Science have equipped him with a deep understanding of various asset classes, their risk-return profiles, and the diverse investment options available.

“When I began projecting for Discovery Invest clients and analyzing retirement statistics, I realized how underfunded many individuals are,” Smith explains. “This realization strengthened my resolve to invest my money wisely.”

Smith underscores the importance of investing as a strategy to combat inflation, which erodes wealth over time. “Unfortunately, many people—regardless of age—lack a thorough understanding of the financial sector and investment vehicles, making them vulnerable to exploitation.”

The Importance of Adequate Coverage

For Smith, financial prudence starts with having comprehensive insurance coverage, including life insurance.

Young people often believe they don’t need life cover due to a lack of significant financial responsibilities. “Many don’t appreciate the value of comprehensive life insurance, including life cover, disability protection, and income loss coverage,” Smith notes.

In his mid-20s, Smith has already secured a robust financial safety net. He holds Group Life Cover through his employer, a Pension and Provident Fund, Income Protection, a Disability benefit, and a Discovery Life Plan.

“The real value of insurance lies in the peace of mind it provides—knowing that if something were to happen to me, my wife would be taken care of. Or, if I were to become disabled at a young age, I would still be financially secure.”

From Small Savings to Strategic Investments

Smith admits that his early investment habits were not shaped by a strong culture of saving. “My first savings account was for birthday money, which I used up when I started university,” he recalls.

Starting to save early is crucial for significant financial growth. Smith notes that his friends who save R50 to R100 monthly for their children accumulate substantial savings by the time they finish university. “A great option for these savings is a tax-free savings account.”

Investing with a Discovery Endowment Plan

“Equities can be volatile in the short term, so I focus on a long-term investment outlook of at least five years,” Smith says, reflecting on his initial serious investment at age 22.

“With limited funds to invest, I chose a Discovery Endowment Plan, where the underlying assets are invested in unit trusts. This plan was ideal for medium-term saving and helped enforce investment discipline, allowing only one withdrawal within the first five years. I used this withdrawal to buy an engagement ring.”

Smith started by contributing R1,000 monthly, increasing his contribution by 20% annually. He now invests R1,440 monthly, and over time has observed steady growth. His endowment is diversified, with 60% allocated to offshore equities and 40% to local equities and property.

The fact that Smith also holds a Discovery Life Plan has led to reduced fund-management fees. Originally between 2-3% per annum, these fees have decreased to around 0.5% per annum due to the cost efficiencies associated with his Discovery Vitality Diamond status.

Stability Through Unit Trusts

Smith has also invested in a bonds-based unit trust. “Bonds function like loans; you lend money and are repaid with interest,” he explains. “They offer good returns in line with inflation and, while potentially volatile in the short term, remain stable over the medium to long term.”

Smith and his wife use this unit trust as a short-term savings account, contributing R2,000 monthly. “We keep our living expenses minimal to maximize savings, which has allowed us to fund a trip to Italy this year.”

In addition to this, Smith holds another unit trust investment focused entirely on equities, with a monthly contribution of around R500. This investment is intended for long-term growth.

Managing Spending and Embracing a Savings Culture

To manage their finances effectively, Smith and his wife use a budgeting app to track spending and prevent impulsive purchases. “Our app helps us monitor our budget and alerts us to overspending, prompting us to adjust our spending midway through the month if necessary.”

Smith stresses that developing a savings culture requires a significant mental shift, which many individuals his age struggle to make. “Saving doesn’t get easier. Despite a nearly doubled salary over time, my investments haven’t increased proportionately. It’s crucial to start strong.”

Understanding Key Financial Terms

Smith emphasizes the importance of understanding key financial concepts to make informed decisions:

  • Bonds: Debt securities where investors lend money to entities such as governments or corporations, which repay with interest.
  • Disability Insurance: Provides a lump-sum payment if the policyholder is unable to work due to disability.
  • Diversification: Involves spreading investments across various asset classes to reduce overall risk.
  • Endowment: An investment vehicle where tax is charged at an average rate, with restrictions on withdrawal for at least five years.
  • Equities: Shares in a company, representing ownership and potential returns.
  • Fund Manager: Manages investment portfolios on behalf of clients.
  • Group Risk: Group life insurance provided as part of an employee benefits program.
  • Critical Illness/Dread Disease Cover: Offers a lump sum if diagnosed with specific illnesses.
  • Income Protector Insurance: Provides benefits if the policyholder is unable to work due to illness or accident.
  • Life Policy: Insurance that pays a sum to beneficiaries upon the policyholder’s death.
  • Money Market: Accounts offering higher interest rates compared to savings accounts.
  • Provident Fund: A social safety net with contributions from both employees and employers.
  • Pension Fund/Retirement Annuity: Provides income during retirement, with tax advantages and growth potential.

By understanding these financial concepts and implementing disciplined saving and investing strategies, individuals can better manage their finances and work towards long-term financial security.