How to Get More Out of the Money You Have in Your 20s

Money and time are scarce resources. And when you think about personal finance, money and time are quite related. 

If you are employed, you typically trade your time (and of course, skill) for money. If you have enough money (and this is relative), you can afford to take time off for a two-week holiday at a place you fancy. 

Even better, if you invest money wisely and earn good enough passive income, you can retire early and maybe, travel the world or pursue passion projects that do not require you to trade your time for money - you actually get the best of both worlds. 

While all this sounds good, many people have either too little of one, the other, or both. If you are employed full-time in a demanding job, you may have a healthy cash flow, but very little time. An unemployed person will have a lot of time on their hands but money will be scarce. 

Understanding how to make the most out of the money you have is an essential skill for anyone trying to achieve financial success. Now, when you factor in time, it goes without saying that the time to improve your financial skills is now, today - since, money earned/saved/invested today will always be more valuable than any future income - Time Value of Money. 

Money is a tool that can help you achieve your objectives. It can provide you and your family with comfort and security, make future planning easier, and allow you to save and invest for important milestones. 

You are most probably familiar with the common proverbs - bend the tree while it is still young, and its lesser flattering variant you can't teach an old dog new tricks. They are universally referenced with good reason - the earlier the better, for most things top on the list being personal finance. 

Whether you are beginning your financial journey straight from college, or are a few years into your professional career, or are now trying to be more intentional about your finances, this article explores the foundational building blocks of a successful financial future - which as we have said, needs to start now. 

How do you make the most of the money you are earning today? How do you stop making the money mistakes that have been holding you back so far? How do you start preparing for responsibilities, big purchases, and long-term planning? Read for insights into these questions and more. 

Learn How to Budget

Are you aware of how your money is being spent? Do you really know where all of your money is going? If you answered no, it's time to create a budget.

Budgeting creates a framework for meeting milestones and measurable goals. It's a tool that helps you allocate resources and reduce waste, allowing you to live your ideal lifestyle. 

Keeping track of where your money has gone, helps you to make better judgments about where it should go in the future.

When you are the first or one of the few members in your family to earn significantly more money than the others, especially in your early career days, you may begin to feel like a walking ATM machine.

There's nothing wrong with aiding family members or friends who have fallen on hard times or are facing financial challenges. However, it is vital that you realise how to go about the 'black tax' and how it can affect you and your finances. Here’s what you need to know as you navigate money, family, friends, and budgeting;

• Pay yourself first

Keep in mind that you must also enjoy and appreciate your hard-earned money. Black tax has a way of making you feel bad for putting yourself first before others who 'need it more.' While the financial needs of your loved ones may be true and urgent, remember that you, too, are on a journey. Make sure you're allocating money appropriately to savings, investments, and retirement, and that you're contributing where you can.

• Don’t spoon-feed people

There is a significant distinction between "giving back to those who helped you" and "supporting the lives of able people who feel entitled to your hard-earned money without necessarily having (or desiring) a relationship with you." Give just enough, but not too much.

• Include ‘black tax’ in your expenses and account for it

If you have money flowing out of your account every month for something, such as ‘black tax’, you must plan ahead of time. Understand the amount of money you're sending your parents or guardians. Even if you don't want to look at the numbers, you should, in order to account for them in the larger context of your financial planning.

Now that you have a more comprehensive budget plan, go ahead and put it to use! 

Also Read: Is Your Budget Failing? 5 Ways to Fix It

Create an Emergency Fund

A road accident, an unexpected medical bill, a broken appliance, loss of income, or even a damaged cell phone are all examples of unforeseen financial emergencies. These unanticipated bills, no matter how big or small, always seem to arrive at the worst possible time.

Setting up a designated savings or an emergency fund is one of the most important things you can do to protect yourself, and it's also one of the easiest ways to get started saving. 

You can recover faster and get back on track towards your broader savings objectives by setting aside money - even a modest amount - for these unanticipated expenses.

People usually set aside money for an emergency fund to assist them in the event of one of the following unforeseen events among others:

• Urgent medical procedures
• Unemployment
• Emergency home repairs
• Accidents
• Death in the family

Review your budget above and calculate how much you need to save each month to cover vital expenses like rent, food, and transportation. The 50/30/20 rule is a good place to start.

Also Read: What is an Emergency Fund and Why You Need One

Start Saving for Retirement

When you're in your twenties, saving for retirement may not be the top priority on your financial to-do list. However, starting to save for retirement as soon as you start earning an income will help you achieve long-term success.

When it comes to building wealth for retirement, starting early is a big benefit since it allows you to leverage the power of compound interest. You may save a little now and earn enormous returns later with compounding.

Participate in your employer's plan at work if you're qualified. Some companies will match your contributions in order to encourage you to enroll. You should consider asking for this job perk when negotiating your compensation package. 

Compound interest, defined as interest earned on a principal sum plus previously accrued interest, can have a significant impact on the value of your money over time. 

Let's give it a clear picture; the first scenario is of someone who is 25 years old and starts contributing Ksh2,000 to their personal pension plan every month at an interest rate of 4%. This person will have Ksh1,399, 880 by the time they are 55 years old. 

Second scenario is of someone who starts saving the same amount of money at the same interest rate but 10 years later (at 35 years old). By the time this second person is 55 years old, they will have Ksh.743,260. In essence, the person who started early will make more money than the one who started later in their career. This is because your money will have more time to compound when you start saving early. 

That’s why it is critical to begin saving today.

Pay Off [Student] Debt and Build a Good Credit Score

Most students get into debt during their college years. It could be a mobile loan, or for many, a student loan such as the government-backed HELB loans. 

Defaulting on a student loan and any other loans taken from your college days that you may have forgotten about may affect your ability to qualify for other bigger personal loans, due to a bad credit score. So how can you go about it?

• Be clear on who and what you owe
  

Take the time to figure out who and how much you owe before you start planning. Make a list of all of your debts, including the outstanding balance, interest rate, and due dates for each creditor. 

Your education loans, as well as any other debts you may have, should be included on this list. Having a comprehensive understanding of your financial commitments will assist you in prioritising and determining the optimal payment method. 

• Increase your monthly payments if you can
  

Paying more than the bare minimum could help you save money on interest throughout the duration of the loan, and you'll pay off your debt faster because you'll be making more payments each month. 

Examine your budget to determine how much you can afford to pay each month. Setting up automatic transfers on a regular basis, such as when you earn a paycheck, is a simple way to make regular and incremental repayments.

Get the Insurance You Need

Navigating health insurance options can be a very tasking process for a first-timer, but nevertheless, a very necessary cushion against the financially devastating effects of hospitalisation.

So, let's put some light on the situation. Here's are some basic questions you need to ask about what your job-based health insurance plan might look like, as well as a guide to help you understand your alternatives when faced with new (or changing) healthcare coverage or when you have to pay for your own insurance;

• What type of insurance plan is it?
• How much will I have to pay for medical care?
• What benefits are included in my cover?
• Are routine examinations covered?

If you do not have an employer-sponsored medical insurance cover, it is wise to go beyond the mandatory NHIF and secure yourself a competitively-priced private insurance cover. NHIF will typically exclude several out-patient tests, medications, and procedures for non-civil servant members.

Having additional coverage from a private insurer ensures you are protected from the high costs of healthcare whenever you get ill and want to seek quality care. Your budget will not be disrupted whenever you need to see your doctor or buy some medication. 

Additionally, it is time to start considering other types of insurance such as vision, dental, life assurance, accident, and disability insurance depending on your income level and needs.

These secondary insurance options need not be urgent but it is a great idea to start learning about the options available to you and when it might be the right time to sign up. 

Set Specific Savings Goals for Future Purchases

What do you see yourself buying in the near future?

Are you looking to buy a car, large kitchen appliances like a fridge or cooker, go for a trip or holiday in Diani? You'll need savings goals to accomplish any of these things. Heather Winston, associate director of financial advice and planning at Principal says, "setting financial objectives can help you focus. "They're a method of making it very plain why you're conserving your hard-earned cash."

The best method to ensure you accomplish your goal on time and stay on track is to create a good financial plan. The Big Red Resilience & Well-Being Money Coaches at the University of Nebraska-Lincoln (UNL) recommend the following steps:

• Calculate the cost of your financial goal or large purchase. If you're saving for a vacation, look into where you'll stay, whether you'll fly or drive, or use the train. If it's a large appliance, look at what's on sale and plan your purchase around that time. If it's a car, what year and model might you be able to afford? Having a precise sense of the entire cost can assist you to avoid running out of money on the second day of your trip or overspending on a purchase.

• Calculate how much time you have before you need the money to make the purchase. If you're saving for a trip in December or purchasing in July for example, you can calculate how many pay periods you have till then. After that, you can figure out how much money you'll need to set aside from each paycheck. 

• Examine your own budget as a whole. You'll need to evaluate if it's even possible within your personal budget once you've determined how much money you'll need to set away from each paycheck.

Also Read: Money Mastery: How to Set & Actually Achieve Your Financial Goals

Master the Basics of Investing

Your twenties are an excellent time to start investing. By intelligently allocating the extra income you are keeping aside, you may build wealth and the freedom to live the life you've always desired. 

Improve your financial literacy before investing and put what you've learned to good use. You have to actively find the resources that teach you about the different asset classes to invest in, understand risk analysis, diversification, and learn also about how to bolster your ability to raise the principal amounts required to invest. 

As an early career professional, you have the advantage of time - remember the time value of money we talked about earlier? - so you can take big risks now and easily recover from any potential losses as compared to someone past their 40th birthday. Take advantage of this, you have to!

While you learn and put to work the investing skills, you have to remember to move beyond basic financial products and for example, place your emergency savings in a savings account, join a Sacco to increase your ability to qualify for bigger personal loans whenever the need arises, automate your transfers, pay off debt, and set long-term objectives.

Investing increases the value of your money over time. When you invest, you put your money into assets like stocks, bonds, mutual funds, and real estate among other asset classes. Investors do this with the hope of making a profit in the future.

While all investments entail some risk, diversifying your investment protects you from volatile markets and even catastrophic losses.

You are never too young to invest. In fact, the younger you are, the higher the odds might be in your favour if you follow the right advice. 

Also Read: Investing for Beginners: How to Get Started

Invest in Yourself

This is about taking care of your health, building your skills, expanding your networks, and generally anything specific to you that makes you a better, happier, and more competent person - both in your personal and professional life. 

You want to earn more work experience, get into a different field, become truly multiskilled, and make a more suitable job candidate, for example. 

Shunning unhealthy practices, staying fit, eating healthy, doing regular health checks, ensuring your health insurance premiums are paid on time and everything that entails the protection of your physical and mental health will always work in your favour as your build your way up financially. 

Whatever investing in yourself looks like, it is necessary to figure out what actions you can take to get there. Here are some of the ways you can invest in yourself professionally.

• Attend workshops, seminars, webinars, etc on various topics that can help to expand your mind and skill set.

• Consider taking up online courses, getting a professional certification in your field of interest, or going back to college to get a specialist degree or a postgraduate qualification. Educating yourself can make you more competitive with your current and prospective employers.

• Learn new practical skills such as time management, communication, decision making, technological skills, etc. These can be very helpful when new tasks or challenges arise.

WRAPPING UP

The point is, you don't want to just work harder; instead, you want to work smarter. Leverage each of the points above, and watch as you get more out of the money you have.

Also Read: Where Do I Keep my savings? The 7 Main Places to Put Your Savings