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The 10 Financial Principles to Master in Your Early 20s
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The 10 Financial Principles to Master in Your Early 20s

When you're in your twenties, it's natural to think you have plenty of time to sort out your finances. But that's far from the truth if you want to lay the grounds for future success. Your twenties are pivotal in establishing a solid financial foundation to serve you for the rest of your life.

During this phase of life, you might be more concerned with self-discovery, building professional and social networks, or enjoying your newfound freedom. Personal finance might not be the most exciting or glamorous topic. But still, there are some financial principles you need to master to set yourself up for success in the long run.

Learning these principles will help you know how to manage your money, avoid instability, and achieve financial freedom.

So, what are these principles?

Read Also: Things I wish I knew About Money in My 20s

Pay Yourself First

The smartest money hack you can learn in your 20s is how to consistently save money. This practice can ensure you live below your means, and when you start saving early, time and compounding interest will work in your favour and your money can grow exponentially. As a rule of thumb, you should strive to save 10% to 20% of your collective monthly income.

So, how can you ensure you do this religiously? Enters the concept of paying yourself first.

Paying yourself first means setting money aside from your paycheck as savings before spending a shilling. The idea is to treat saving as a priority instead of an afterthought. So instead of saving what's left after paying your bills and expenses, you spend what's left after saving.

For instance, if you save 15%, you will live on 85% of your income. Depending on your priorities, you can direct that money to build an emergency fund, save for retirement, repaying high-interest debt, planned purchases, or your investment accounts. 

Read Also: 10 Effective Money-Saving Challenges to Try in 2023

Build An Emergency Fund

From time to time, unexpected money problems are going to pop up. Your emergency fund is the savings you use to cover these surprise expenses. If you experience any financial hardships, such as unemployment, unexpected medical expenses, or losing a phone/laptop, your emergency fund will cover you.

Depending on your average monthly expenses, job stability, insurance coverage, and overall financial situation, you should have at least three to twelve months of expenses saved up for emergencies.

An emergency fund gives you peace of mind and provides a financial safety net. It can help you avoid taking on debt or dipping into your savings. Moreover, having an emergency fund may give you more flexibility to take risks in your career, such as quitting a job to pursue a new opportunity or starting your own business.

Read Also: 9 Rules for Establishing an Emergency Fund In 2023

Create a Budget to Track Your Money

As a young person, getting caught up in the excitement of new experiences, travel, and social events is easy. If you are not careful, you can quickly lose control of your money, overspend, and get into unnecessary debt. The key to avoiding this is creating a budget and following it to the letter.

A budget is a spending plan that helps you track your spending and not waste money. It will help you to live within your means and save for the future comfortably. 

To create a budget, you first need to know how much money is coming in (your income) and going out (your expenses) monthly. Next, use that information to create a spending plan that fits your lifestyle and goals.

While there are you can try multiple budget rules you can try; the 50/30/20 budget is more beginner-friendly. It's flexible, easy to structure, and you can constantly adjust the percentages for your needs and goals.

Here's how a 50/30/20 budget works: 

50% Covers Needs —like housing, utilities, health care expenses, minimum debt payments, and other essentials. 

30% Covers Wants — such as clothing, entertainment, social outings, vacations, and dining out.

20% Covers Financial Goals — like building your savings or paying off debt.

Read Also: How to Plan and Create Your 2023 Annual Budget

Set S.M.A.R.T. Financial Goals

Setting financial goals is an effective way to achieve financial success as it provides the clarity and focus you need to track your progress and stay motivated. Additionally, they contribute to financial security by promoting time management for long-term goals like retirement planning and facilitating informed decision-making aligned with your objectives.

When setting financial goals, you should make them SMART. This framework increases your chances of success. SMART goals are Specific, Measurable, Achievable, Relevant, and Time-bound.

For your goals to be SMART, they should be well-defined, attainable, relevant to you and your finances, and have a well-stipulated deadline. An example of a SMART goal is “I will save Ksh50,000 by January 2024 by setting aside Ksh10,000 monthly from my income to build an emergency saving.”

Emergency savings is just an example. In your 20s, you can set different financial goals ranging from short-term objectives like going for your first solo vacation, medium-term ones like furnishing your house, to long-term ones like setting a retirement date. Whenever you set a goal, make them SMART.

Read Also: 8 Money Rules You Must Follow On Your First Job

Understand How To Use Credit Responsibly

Debt is often seen as a negative measure, but it can potentially have positive aspects when used and managed carefully. To understand how debt works, it's important to distinguish between good and bad debt.

Good debt generally refers to money borrowed for purposes that can contribute to building wealth or increasing income over time. Examples may include student loans, mortgages, or business loans. On the other hand, bad debt typically does not add value to your net worth, often comes with high-interest rates, and is used for non-essential expenses or to buy assets that may depreciate.

Once you grasp the concept of debt, you are faced with a decision: whether to leverage debt to your advantage or aim to become debt-free.

Leveraging debt involves using borrowed funds to potentially increase the returns on investments. However, it's important to remember that this approach also comes with higher risks, as losses could be magnified.

On the other hand, being debt-free means having no outstanding debts. Adopting a debt-free lifestyle requires managing your finances to minimize reliance on borrowed money for daily expenses or major purchases. Instead, you aim to pay for everything with cash or money you already have.

Read Also: How to Enjoy a Debt-Free Life in Your 20s 

Practice Mindful Spending

Mindful spending refers to making purchasing decisions that realistically support a balanced, quality lifestyle through informed financial habits. 

Mindful spending brings financial well-being, reduced clutter, and saves you money. It curbs impulse buys and fosters responsible consumption, leading to a more intentional and fulfilling financial life. All this can help you increase your saving, achieve financial goals, and avoid bad debt.

To practice mindful spending: 

  • Create a budget and track expenses
  • Plan your purchases, 
  • Avoid temptation and don't fall for advertisement 
  • Shop with a list
  • Take 72 hours to think about a purchase 
  • Avoid emotional shopping and find alternative ways to de-stress
  • Avoid brand products by focusing on value over a name

Read Also: Mindful Shopping: How To Be Deliberate About What To Buy

Learn to Invest and Start Investing Early

When it comes to investing, young adults often postpone the crucial decisions to start early because of their modest salary, lack of financial education, and abundance of time. Yet, contrary to this belief, those in their twenties are in an advantageous position to venture into the world of investments. 

Starting to invest early has many benefits, but the main one is time. First, you can use compound interest magic to grow your money exponentially. Second, you can take more risks since you have time, and if things go south, you can always bounce back. Finally, you also have a longer time horizon to take advantage of market opportunities and withstand volatility.

To start building an investment portfolio in your 20s, you first need to understand how investing works and how it can help you get the best out of your money. Consider reading financial literature and consuming financial content from reputable sources, enrolling in financial literacy classes, or seeking guidance from financial advisors. This will help you learn how to build an investment plan, minimise risk, and achieve your goals.

Read Also: Investing in Your 20s - A Beginners Guide

Avoid Lifestyle Inflation

Lifestyle inflation refers to the change in spending habits associated with increased disposable income. The idea is that your lifestyle habits improve and become more luxurious as your salary increases. This can be as subtle as moving from a Ksh7k bedsitter to a Ksh20k studio apartment for no reason or as substantial as changing your wardrobe every three months.

Lifestyle inflation can happen to anyone. Income increases are often naturally followed by lifestyle spending increases, which can harm your savings and financial health if you are not careful and in control of your money.  

To prevent lifestyle inflation, you need to learn how to level up and improve your lifestyle without sacrificing your future. This means you should learn to prioritise your financial goals and postpone instant gratification.

Your best defense against lifestyle inflation is learning to budget. Budgets are the enemy of spontaneity as it allows you to dictate and plan how to spend money. Second, anticipate income increases and give your money a job—before you even receive it. This will prevent you from wasting it. 

Read Also: How to Avoid Problems When You Start Making More Money

Plan for Major Life Events

The greatest action you can take in your 20s is to be prepared for everything. Yes, you are just starting life, but soon life will happen, and you will have a lot of responsibilities that can be financially draining if they catch you off-guard. And as we have established above, the things you do in your 20s define your future life and bring you the success you want.

Life is full of major events that can affect your finances in a significant way. Planning for them ensures you stay prepared and can alleviate some of the stress that tends to accompany them. 

Some of the most significant life events to prepare for are loss of income, switching jobs/income changes, a new baby or marriage, major purchases like a car or a house, retirement, and estate planning. To prepare for these events, you should consider making them part of your financial planning.

Understand Behavioral Finance

Did you know that personal biases and psychological influences can affect your financial decisions?

Behavioral finance is a field that explores how emotions, biases, and cognitive limitations can affect the choices we make regarding our finances. The main idea is that you can enhance your decision-making abilities by understanding how you behave in certain financial situations. This approach differs from conventional financial theories, which assume that individuals are entirely rational when dealing with money.

The primary benefit of understanding behavioral finance is that it can help you grasp how to make more informed financial choices. When you understand your emotions and biases, you can make decisions based on your financial goals, spending habits, income, and risk tolerance rather than being solely influenced by irrational feelings such as envy, guilt, fear, or greed.

For instance, when investing, this knowledge will empower you to create a well-balanced and suitable portfolio that aligns with your individual needs and goals and matches your financial situation.

Read Also: How Fear, Guilt, Shame, and Envy Affect Your Financial Goals


Your 20s are a significant and transformative period in your life. During this time, you are likely to venture out on your own, begin your career, and start making money. As such, mastering sound financial principles you can carry throughout your life is essential. Learning and practicing them early in life is much easier than dealing with blunders later.

As you navigate through your 20s and discover what truly matters to you, it's crucial to establish money-related habits that align with your values. You should be intentional about how you manage your finances and make financial decisions. Ensure that your money choices reflect what you truly value and prioritize. 

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.

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