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How to Set up Strong Financial Foundations in Your 20s
Money Management

How to Set up Strong Financial Foundations in Your 20s

Our twenties are a foundation to build our future. This stage in life is marked with limitless energy, curiosity, and a profound desire to crack the matrix of life. Amid this youthful enthusiasm and the allure of endless possibilities, there lies the responsibility of establishing a strong financial foundation.

Establishing Financial Goals

Having goals is crucial in one's financial journey. Without goals, you lack something to pursue. Goals are conscious targets that increase motivation and productivity and inform the right implementation processes. 

Here are a few reasons why you need goals to establish your financial foundation properly.

  • Goals give you a roadmap to adhere to on your journey to financial success. 
  • Goals give a sense of personal satisfaction. Once a goal is set, it usually seems far removed. However, gradually, as you work on the goal, it becomes easier to manage, hence a sense of personal satisfaction.
  • Goals allow you to prioritise. By having a step-by-step action, one can rank their goals in the order of priorities and how they want to achieve them. 

Goal setting provides a direction to orient your actions towards a financially secure future.

Read Also: 10 Long-term Financial Goals to Start Today

Short-Term and Long-Term Financial Goals 

Having short-term and long-term goals is a crucial step in creating a purposeful and fulfilling financial life. 

For short-term goals, you want to achieve them within the next few months to a year, whereas long-term goals are broader in perspective and objectives. You aim to achieve these in a more extended time spanning several years.

Let’s have an overview of short-term financial goals that you can pursue

  1. Having an emergency fund account

This can be achieved by opening an account and depositing money depending on your cash inflow. Within three to six months, the pooled resources can serve as an emergency fund, in case you experience any financial setbacks. 

  1. Offset debt 

Unchecked debt leads to a cycle of financial stress and uncertainty. Having a short-term goal aimed at clearing your debt will break this cycle. You can do this by reducing high-interest debts first and setting a timeframe for yourself to clear the debt. 

  1. Healthcare expenses

Illnesses and medical emergencies are never planned for, and when they strike, they can cost a pretty penny. Having medical insurance will save you so much stress and uncertainty. It is advisable to have health insurance as part of your financial goals. 

  1. Plan for vacations and holidays. 

Save throughout the year for holidays, travel, and vacations to avoid financial stress. 

These are just some short-term financial goals you can set for yourself. These financial goals help build the discipline to set more robust long-term goals and follow through.

Long-term financial goals provide a pathway to securing your financial future, enabling you to achieve your dreams and map out a stable financial position over several years. 

Examples of long-term goals would include:

  1. Increase your potential earnings 

While in your 20s, this is the time to network and learn skills. By being diligent in learning, you can unlock greater earning opportunities. You also have the opportunity to invest and create passive income. 

  1. Financial security 

The measure of how financially secure you are is how long you can live without income. Covid 19 exposed the need to be financially secure as most people did not have enough to survive the pandemic. As a young person, it is high time you pay attention to financial security.

  1. Be a homeowner.

Being a homeowner is a dream of many. However, to achieve the dream, one needs a plan. The plan starts from having a goal. Commit yourself for several years, setting funds aside to help you build your home or repay all your mortgage.

  1. Early retirement 

While in your 20s, retirement seems like a lifetime away. But time flies, and soon before you realize you are in your 50s. It is prudent that you start planning for your retirement early, and if you are ambitious, you can start planning for early retirement.

  1. Create generation wealth. 

A joke often flies around, “Where were our grandfathers when other people were acquiring huge tracts of land?”. Well, if your dream is to avoid such a question, it is high time you become clear with your financial goals. 

Read Also: How to Set and Actually Achieve Your Financial Goals

Creating a Budget

A budget is a guide to secure a robust financial standing over time. Having ample funds presently is no guarantee of stability in the future. 

A budget safeguards and ensures that your spending remains in check. Doing so paves the way for steady savings, nurturing the promise of a brighter future and securing your financial well-being.

Another crucial facet of budgeting is it empowers individuals to plan for several years, providing the necessary metrics to control overspending and mitigate risky financial behaviours. With a budget in place, meticulously tracking expenses and adhering to a financial plan enable timely bill payments, averting the chaos and stress accompanying financial disarray caused by a lack of a budget.

However, it's crucial to track and adjust the budget as circumstances evolve. Flexibility in budgeting empowers you to navigate life's dynamic situations with grace, adapting to new circumstances without losing financial balance.

Read Also: What to Include in Your Budget

Saving and Investing

In our youthful years, we shape our identities, set aspirations, and plant the seeds of our future success. Here is the importance of saving:

  • Establishing Discipline - Cultivating a habit of saving regularly lays the groundwork for discipline. 
  • Peace of Mind - Financial constraints are a significant contributor to mental health issues. By saving regularly, you can break free from this cycle, allowing yourself to navigate life with a stable mind and minimal financial worries, promoting mental well-being.
  • Independence - Embracing a disciplined financial approach liberates you from dependence on external sources for financial support, fostering independence and granting you the freedom to make choices.
  • Wealth Accumulation - Regular savings, combined with strategic investments, form a potent habit that nurtures wealth accumulation, potentially building generational prosperity.

Read Also: How to Create a Goal-based Savings Plan

Investment Options in Kenya

The Kenyan financial market offers diverse opportunities for individuals seeking to grow their wealth and achieve financial independence. Here are some notable options available:

  • Bank Saving Accounts - Offered by commercial banks, these accounts may be fixed-term or call deposits, providing flexibility in withdrawal options.
  • Mutual Funds - Professionally managed pooled funds that invest in diversified portfolios of stocks, bonds, or other assets, allowing access to diverse investments with varying investment amounts.
  • Pension Funds - Schemes designed to help individuals save for retirement, often with tax benefits and long-term growth opportunities.
  • Treasury Bills and Bonds - Low-risk investments provided by the Central Bank of Kenya, offering returns over specified periods.
  • Forex Exchange Trading - Involves buying and selling currencies on the foreign exchange market. However, it requires skills and a good understanding due to its volatility.
  • Stock Market - The Nairobi Securities Exchange is Kenya's primary stock market, enabling investment in publicly traded companies and providing potential returns based on company performance and market dynamics.

In addition to these benefits of saving and investing is compound interest. This is where interest is computed not only on the initial amount saved but also on the accrued interest, resulting in accelerated savings growth. 

Managing Debt

Mishandled debt can become burdensome. Here are three common types of debt, each with unique implications:

  • Consumer Debt - This includes credit card debt, personal loans, and other debts accrued for personal expenses. High interest rates can make these debts financially burdensome, affecting credit scores and overall financial health.
  • Mortgage Debt -  Acquired to purchase a home. Defaulting on mortgage payments can lead to foreclosure, resulting in the loss of the property.
  • Student Loans - Incurred to finance education. While an investment in the future, large student loan amounts can strain financial resources for an extended period.

Some effective strategies for managing and reducing debt include:

  • Create a Comprehensive Debt Inventory - Document all obligations, including interest rates, repayment schedules, and monthly commitments. This provides a clear overview to guide repayment efforts.
  • Prioritize Debts by Interest Rates - Target debts with higher interest rates first to prevent their accumulation and financial strain.
  • Develop a Budget - Construct a detailed budget outlining income and expenses. Identify areas where costs can be reduced, allocating the saved funds toward debt repayment.
  • Establish Multiple Income Streams - Diversify income sources to bolster cash inflow, expediting debt repayment within a shorter timeframe.

Read Also: 10 Unhealthy Debt Practices You Should Avoid

Building Multiple Income Streams

Multiple income streams are a strategy that you can use to diversify your income. Through multiple sources, one can get more income and reduce the risk associated with relying on just a single source of income.

You can increase your income through the following ways: online writing, remote tasks, rental income, interest accrued on capital, and dividends royalties, among others.

One cannot stress the need to have different sources of cash inflows enough. It's upon you to equip yourself with adequate skills to make money aside from the 9-5 job.

Wrapping Up

Having a strong financial foundation in your 20s is an intentional commitment. You have to be clear on what financial goals you want to achieve, both short-term and long-term. You also need to master your budgeting, savings, and investment. In addition, you need to ensure that you manage your debts properly and, most importantly, increase your sources of income. 

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Stephen Kimani aka KIMSpeaks is a thought leader, speaker, and writer. He is also the Founder of Living the DREAM. He is passionate about learning and teaching ideas that empower people to improve the quality of their lives. You can connect with Kimani on LinkedIn.

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