Should you get serious about personal finance in your mid-20s? Absolutely. It's the perfect time to start building your financial foundation. And you want it as strong as it can be.
It's easy to get lost in your youthfulness and forget to create a roadmap that will ensure your stability when responsibilities start to mount. Five or ten years from now, you'll look back; when you do that, you'll want to be proud of your decisions. But if you ignore even the most basic personal finance principle, like having an emergency fund, you'll find yourself in a constant state of regret.
All the regrets and the thoughts of "I wish I didn't do that" are caused by making obvious financial blunders you can avoid. This article will discuss some of those blunders, why you should avoid them, and how they can come to haunt you later in life. Read on.
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Right now, you might think that retirement is far away, and by the time you reach the golden age to hang your professional tools, you'll be set. But it's not always that rosy. To have the retirement you desire, you must save for it and start as early as possible. Soon, you'll have to take on more responsibilities that will supersede the importance of creating a nest egg. And if you haven't started, it will be harder to start now.
Starting to save early for retirement has a lot of benefits. First, there is the magic of compound interest and reinvesting. With time on your side, your investments could see higher returns as all profits will be reinvested to generate even more profits.
Starting early also allows you to be more aggressive; you can withstand market volatility by investing in high-risk instruments. If your investment fails, you will also have time to start fresh and learn from your mistakes. Additionally, you can enjoy the luxury of retiring early once you reach your goals and are financially secure.
On the other hand, a lack of early retirement planning makes you susceptible to financial instability. Think of a scenario where you are forced into early retirement due to illness or your skills becoming outdated, and you haven't built a safe nest egg. This can put you in an uncomfortable position where you won't be able to provide for yourself and might be forced to depend on others.
Saving money is important, and it's something you should prioritise in your 20s. But that doesn't mean you should put all your money in a savings account. Granted that they're easy to open, relatively safe, and you can access your money anytime, thanks to ATMs and Internet banking, a savings account shouldn't be your ideal saving avenue.
Putting all Your Money in savings accounts presents one big obstacle: inflation. The interest you earn from your savings might be struggling to keep up with the increasing inflation rate. If, for instance, you earned interest at 7% per annum on your savings and the inflation average of 6% that year, your total returns will be 1%.
If you saved, say, Ksh100,000 at the rate of that 7%, after factoring in inflation, your returns would be less than Ksh1,000. If you invested the same money in another riskier investment but promised a 15% return per year, you'd make Ksh8,490 as profits after factoring in inflation.
Instead of putting your money in a savings account, consider looking for other investments that protect you from inflation and give attractive returns. Start by determining your risk tolerance level and learn investing strategies early to ensure you get the best out of your money while still young.
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What do you do when you see an irresistible pair of shoes and don't have the cash to buy them? Maybe your salary has been delayed, or you have other financial obligations? You might have to rethink your financial decisions if you are the kind of person who rushes to take a quick loan to purchase it or buys it on "buy now, pay later" terms.
Buying shoes or taking out a loan isn't bad, but you might be hurting your finances when you find yourself taking on debts to fund liabilities. You'll be taking on too many obligations that might backfire on you.
For instance, imagine taking a quick loan of Ksh3,000 from a Loan App to buy the shoe and forgetting about it. Three months later, you find yourself listed on CRB when you want to take another loan.
To avoid consumer loans that might affect your creditworthiness and cost you too much in interest, ensure that:
Splashing cash and living beyond your means to impress your peers might feel nice today; you will feel like you belong in a community and have status. But some years down the line, when you wake up and realize you are behind all your saving goals, you’ll look back to this moment with a frown on your face.
You can try to please everyone around you or show off how well you are doing, but they’ll soon forget about your spending. Or worse, don’t even notice. So why not put that money in avenues that will help you achieve financial independence, like investing or buying an asset?
To ensure you avoid this trap and have nothing to regret in the future, learn to live within your means and pay yourself first. Create a budget and stick with it. And keep like-minded friends that don’t judge you by how much you can outspend them.
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Yes, you are making money and maybe have decent savings and investments. But are you doing it to accomplish something? Do you have any goals and plans for how you will spend the money you are accumulating?
You need a financial plan to ensure you are not just saving for nothing. As a young adult, financial planning may prepare you to deal with life's financial ups and downs. You don't have to know everything, but learning the fundamentals will offer a good basis. It will help you develop good money habits, give you a purpose and financial confidence, and help you identify, mitigate and address risks.
Without financial planning, you won’t be able to achieve goals such as paying off your HELB loan in time, investing your money, or planning for your future. Having a plan can help you perfect your financial decision-making ability which will help you as you get older. But when you don’t develop these plans early, you will have a hard time playing catchup in the future.
If you want to be in a better place financially in 10 or 20 years, you must teach yourself how to adapt and take risks. When you get comfortable and stop looking for new opportunities, you will hinder your growth professionally and financially.
This is because, as a person, you will often learn the most about yourself when you learn to take on new challenges and test your limits. Comfort zones can encourage your investing fears and hold you back from making bold financial decisions.
Some things you will find comfort in your 20s that you might come to haunt later include sticking to a low-paying job, being content with your skill levels, or not expanding your networks. All this might affect your progress and prevent you from reaching your goals and dreaming bigger.
This is one of the biggest financial blunders you will likely make in your 20s. You have started making money, and the next obvious step is usually to use that money to make more money by investing. But as a novice, investing mistakes are hard to escape. And even harder when you invest blindly without doing any research.
Some of the reasons that lead to these blunders and ones that you won’t forget when they backfire n you include:
Fear of Missing Out: Every once in a while, a new investment scheme will pop up, and everyone will rush to it. And because you mistakenly think it's an opportunity, you also put your money into them without any research. Two weeks later, you sadly learn it was a Ponzi scheme, and your money is gone.
Greed: The need to get rich quickly can be infectious. In your 20s, you will find yourself wanting all the luxuries life has to offer. So you exaggerate your risk tolerance, put your money in high-risk investments, and lose it all.
Peer Pressure: This happens when you invest in something because all your friends are doing it. You think they all can’t be wrong, and since you don’t want to be seen as an outsider, you do it.
Investments carry risks. Therefore, before you put your money in any vehicle, always conduct proper research to understand all the risks involved and how you can minimise them.
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Insurance might seem like something that you don’t need and another deductible from your gross income that you don’t want. You might even feel the need to ignore the most basic one like health insurance because, you know, you are young, healthy, and don’t remember the last time you got sick.
Insurance can come in handy in different scenarios. It will prevent you from digging into your savings every time you have an expected bill to settle. This, in turn, ensures that your savings goals are not interrupted by emergencies. Some vital insurance covers that you will never regret you bought in your 20s include
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The biggest financial myth you can believe in your 20s is that you are not rich enough to start diversifying your investments. Putting all your eggs in one basket can be the biggest blunder you'll never forget if the basket drops and all your eggs break.
When that happens, and you lose all your money, you'll have to start building up again. Your goals, such as buying your first car or paying off your student loans, will have to be delayed.
Diversifying your investments in your 20s will require that you learn how to create different portfolios for different financial goals. Risk tolerance, time horizon, and net worth are other factors to consider when diversifying and allocating your assets.
Without prior experience, this can be a challenging undertaking. Therefore, if you are unsure how to go about it, talk to a financial expert.
The point of diversifying is to lower your risk of losing too much money. If one investment fails to give you returns or costs you, the losses will be cancelled by profits from your other investments.
One of the best ways to diversify when you have limited capital is to invest in vehicles that pool money from different investors, invest on their behalf and pay dividends. Examples are SACCOs, mutual funds, REITs, and unit trust funds.
When starting long-term and committed relationships, one of the hardest conversations is about money. But ignoring this subject and choosing to ride into the sunset can distract later. Countless research shows money is one of the biggest sources of conflict in relationships and marriages. To avoid those disputes, you must ensure that you are on the same page about your finances early on.
You've probably made some observations, and you know how frivolous or frugal your partner is. You know little about their money attitude, and they've told you about their retirement plans. But now it is the time to dive deeper and have those uncomfortable money conversations you always keep to yourself.
Here are some topics you can start with:
These discussions will make it easier to align your finances and gauge how compatible your financial attitudes are. You'll then both have to decide where to make some compromises to improve your relationship. Skipping this stage can haunt you when you start having constant disagreements over money in the future.
The common lie most people in their 20s tell themselves before making bad financial decisions is, "I'm still young, and I'll recover." That's true. You might recover. But what about all the opportunities you'll miss along the way? All the loss you'll incur? All the money you'll waste? All these things will haunt you, and you won't be proud of how you spent your money.
It's not uncommon to make some financial blunders in your twenties. But when you take control of your finances and learn to make level-headed decisions, you will likely see the danger sign from miles away. You'll quickly change course and save yourself from losing money. And as you get older and hopefully richer, your ability to make the best calls will only improve.
To build a strong foundation in your twenties, prioritise gaining financial knowledge. This is your best way to keep yourself from making mistakes that can affect your growth and those that will come to haunt you later in life.