Financial choices in your 20's: Part 1

Guest post by Young

For most people in their twenties, the idea of saving and investing seems like a lifetime away. Most people don’t start thinking about saving or investing for future until they are well into their 30's. It is important to realise that the choices you make in your 20's play a critical role in your future financial security. Here are some tips that will help you to build a solid foundation for your future.

Focus on your career

In your 20's, getting established in your career and earning a regular income should top the list of your priorities. This is the time to invest in yourself, to acquire and develop those skills that will enhance your career and boost your earnings. You might have good ideas about becoming an entrepreneur and getting rich, but the discipline of earning regular income from a job and sticking to it for a time, will go a long way in preparing you for lasting financial security.

Acquire financial education

Take deliberate steps to improve your understanding of money matters. There is a plethora of information in the media, books, magazines, newspapers, seminars and the internet that will help guide you as you make decisions.

The first step in financial planning is to identify your goals. Your short-term goals (under five years) might include a wedding, buying a car or taking a vacation. Your medium term goals (five to 10 years) may be to build a house or get a mortgage, whilst your long term goals may be to plan for your retirement and children education.

Live within your means

It is very tempting when you first start earning, and particularly where you have few financial responsibilities, for you to spend excessively on clothes, accessories, new gadgets, mobile phone bills. All these can be a serious drain on your finances at this stage if not carefully considered. Look over your income and monthly expenses. Create a budget so that you can see exactly where your money is going and make adjustments where necessary.

Be cautious about borrowing

It is better to borrow for things that have lasting value such as a home or an education rather than for consumables such as gadgets and clothes. Give yourself a deadline by which time you would have paid off or at least reduced the most expensive debt, usually credit card or store card debt. Pay your bills on time so that you can build a solid credit history from now. This will be important when you need to borrow more significantly in the future.

Pay yourself first

Once your debt is under control, automate your saving. Even if money is tight, try to have atleast 10 percent of your monthly income (all that you receive, be it salary, wage or gifts) transferred to savings or to a mutual fund account through a direct debit. Start small; you will be surprised how quickly this builds up. If you are more aggressive, you can push the savings up to 40% and live on 60%, especially when you are young and single.

In your 20's, you have the luxury of time. Even where you make mistakes, there is time to recover as your investment earnings grow over several years; this means that if you are consistent and disciplined, your savings will be able to grow significantly. Remember too, that this is the time to travel, pick up new skills, and have new experiences before you have larger responsibilities to take care of. Time is on your side; so enjoy it.

Start investing to meet your goals

Historically, the stock market has out-performed other types of investments over the long term, but it comes with some risks. If you don’t own any stock, the market continues to present an opportunity to purchase attractive stocks at decent prices. If you don’t have the time or expertise to select stocks and you have only a small sum of money to invest each month, a stock market mutual fund may be the ideal investment to meet your medium and long-term goals. Better still; put your money in real estate. Buy pieces of land within 20 km of cities or near upcoming towns (County HQRs) and speculate. In Kenya, nothing is paying better than this, and in fact real estate has made young millionaires than any other sector within the last decade. It is only difficult when you have not started, or at least, don't know what you want. But before investing in real estate, due diligence is necessary. 

Seek guidance and wise counsel of a trustworthy person who is already investing in the field you want, be it stocks, money market or real estate. However that does not underscore the importance of your own research and seeking knowledge in the field.

It may seem odd to talk about retirement when you have barely got started with work; naturally you are more concerned about your job and not the end of your working life which is decades away. As soon as you start work, you will be eligible to contribute to a Retirement Savings Account (“RSA”) through your Pension Fund Administrator (“PFA”) You have an edge if you start to invest regularly for retirement from now, and you have a better chance of building a significant nest egg with relatively little effort.

Accommodation is often a challenge. Even if you are fortunate enough to have a free roof over your head provided by your parents or other family members and friends, you can contribute to family expenses on items like utility bills. You can also set aside some of the money that you would have had to use for rent to build up equity towards getting a mortgage so that you can own your own home.

Earn your independence

It is the desire of every parent to ease the path for their children and most children will embrace this gladly. Whilst it’s nice to get a lot of help from your parents, don’t let it get in the way of your attaining financial success. Earn your independence and start to take charge of your financial life. Your parents provided you with an education; now you are no longer a child; your finances are your responsibility.

The habit of managing money is more important than the amount. It is not how much you earn that matters, it is how much you keep. The key to building a solid foundation for future financial security is to have a budget, save, invest regularly, and control your debt. The choices you make now, will largely determine how your life will be in the future.

We shall pick up from here in our next post. Please share a link of this blog to any young adult you know. FE might just be the answer they are looking for to shape their financial future.