In your first job, earning your first paycheck, or moving out of your parent’s home to live on your own. You could even be experiencing your first love or your first heartbreak. It’s an exciting time, full of new challenges as you try to figure out different aspects of your life. But while you’re navigating these milestones, your 20s are also the perfect time to start building healthy financial habits that will set you up for the future. Of course, it’s not the only time, but getting started now can make a huge difference. Talking about finances in your 20s might feel new or overwhelming, depending on your perspective. It can also be hard to find the right information to get started. So, let’s explore some essential steps you can take to work toward financial independence and freedom in your 20s.
Be Clear on Your Financial Goals
We all have different financial goals because we want different things in life. Have your financial goals specified, preferably writing them down. Research has shown that you are 42% more likely to achieve your goals if they are written down. That is a staggering increase discovered in a study by researcher and psychologist Gail Matthews. Writing your goals, intentions, and priorities helps to increase your clarity and focus. Examples of financial goals for different people might be:
- Starting a business.
- Owning a home.
- Buying a car.
- Investing your money.
- Owning an art collection/ being an art collector.
- Being a millionaire in your 20s.
Financial freedom looks different for everyone, and it’s perfectly okay to have goals that differ from those of your peers. The key is to focus on what you want for your future. Take time to envision yourself achieving those goals as you map them out. Setting a time frame for each goal is important because it helps keep you motivated and on track. Remember, you might share similar financial goals with others, but your timeline to achieve them could be completely different and that’s fine. The journey to financial independence is personal, and it’s all about finding what works best for you.
Set A Budget
By now, you’ve probably heard how important it is to have a budget. A budget is simply a way of keeping track of your spending and allocating your finances wisely. In your 20s, you might be starting your career or noticing that your income is increasing each year. Creating a budget doesn’t need to be complicated, it can set a solid foundation for your financial future.
Start by giving yourself at least three months to monitor where your money goes. During this time, try to spend as you normally would to obtain an accurate picture of your habits. Afterward, allocate your finances, prioritizing your most important expenses like rent, bills, and utilities. Once those essentials are covered, you can focus on secondary needs like entertainment, dining out, and vacations. Having these priorities set will help you avoid overspending. For instance, if you’ve planned for a trip but realize you’ve already spent the money you allocated, it’ll prevent you from dipping into funds meant for other purposes.
With your budget in place, you’ll have a clear path forward. You’ll know where your money is going, and that’s a step toward building your savings and achieving your financial goals. Click here to learn more about why budgeting is important for financial independence in your 20s.
Have an Emergency Fund
It’s crucial to have an emergency fund, a financial cushion that protects you from unexpected expenses in the future. Start by calculating your total expenses for a specific period, such as one year. For example, if you earn $1,000 per month and your monthly expenses are around $700, you should aim for an emergency fund of $2,100 to cover three months of expenses, and $8,400 for a full year. It’s okay to start small. Begin by saving enough to cover three months of expenses, and once you’ve reached that milestone, you can work toward a year-long safety net.
To maximize your emergency fund, consider using savings platforms that compound interest, allowing your money to grow over time. For instance, Money Market Funds such as Kuza Money Market Fund are ideal for those who prefer low-risk investments. These funds offer competitive interest rates, compounding the interest annually, meaning your emergency savings will continue to grow as you save. Gone are the days when money sat idle without working for us. Thanks to fintech, accessing these savings options has never been easier since you can find them on mobile apps, often with all the information and tools you need to get started.
An emergency fund is important for everyone, whether you have a consistent income or not. For those with irregular income, saving more is especially important, as you may face longer periods without earnings. Your emergency fund is a buffer, ensuring financial stability in uncertain times.
Get an Insurance
Insurance is a great way to protect you in your 20s from unexpected spending. Insurance is a contract, represented insurance is a valuable way to protect yourself from unexpected expenses in your 20s. It’s essentially a contract, represented by a policy, where the policyholder receives financial protection or reimbursement for specific losses from an insurance company. The company pools the risks of its clients, making coverage more affordable for everyone.
Some common types of insurance include:
- Health insurance: Covers part or all of your medical expenses, offering financial protection if you face unexpected healthcare costs. Most people have some form of health insurance.
- Life insurance: This pays a designated sum of money to beneficiaries upon the policyholder’s death. In exchange, the policyholder makes regular premium payments throughout their life. Life insurance provides financial security for loved ones, covering living costs, debts, and other future expenses.
While insurance might not seem essential in your early 20s, it can be a lifesaver in the long run. Take the time to explore different policies and find one that fits your specific needs before deciding to get insured.
Setting up Separate Savings Accounts for Different Goals
By dividing your savings, you can allocate funds for specific purposes, such as an emergency fund or a sinking fund which is a dedicated savings account where you set aside money gradually for a specific, future expense such as a new car, household items, or holidays (happiness fund). This method allows you to track progress toward each goal individually, helping you avoid dipping into one fund to cover another, and ultimately, makes budgeting simpler and more transparent.
With separate savings accounts, you’re able to manage your money more intentionally and stay prepared for both planned and unplanned expenses. For example, having an emergency fund ensures you’re covered for unexpected costs, while other accounts can be geared toward long-term goals. This approach not only boosts your financial discipline but also keeps you motivated as you watch your savings grow for each specific purpose.
Plan for Your Retirement
This is a great tax reliever and if you start as early as your 20s, it’s a great asset in your later years. This is setting aside funds early and consistently to ensure financial security when you stop working. Start by determining how much you’ll need based on your desired lifestyle and consider increasing the amount as your income grows. The earlier you start the more you can benefit from compound interest, giving you a solid financial foundation for your future.
Learn More Skills and Advance Your Career
Thanks to technology, we have unprecedented access to educational resources that allow us to learn new skills from anywhere at our convenience. Numerous online courses are available across various fields, enabling you to acquire skills beyond what you learned in school. This commitment to continuous learning is crucial for opening up more opportunities in the future. By diversifying your skill set, you enhance your professional offerings, which can significantly benefit your career advancement.
When you receive a job offer, it’s essential to advocate for yourself by negotiating your salary. A helpful guideline is to avoid stating your desired salary before fully understanding the responsibilities of the position. Additionally, refrain from disclosing your previous salary, as it may undermine your ability to negotiate based on your current skills and value. Remember, your 20s are a time for exploration and growth, so take things one step at a time as you navigate your career journey.
Invest Your Money
Investing your money is putting it somewhere and then allowing it to work for you. Today, there are many investment opportunities and platforms which are easily accessible to you. Some types of investments are:
- Stocks.
- Bonds, for example, government bonds.
- Investment Trusts like Real Estate Investment Trusts (REITS), e.t.c
The advantage of investing is the expectation of a positive return in the form of income or price appreciation with significance. Investors can independently invest without the help of an investment professional since technology has also afforded investors the option of receiving automated investment solutions by way of robo-advisors. Risk management is an important factor when it comes to investing. The amount of risk in an investing strategy is influenced by the frequency with which an investor takes on risk in an individual investment. Identify if you are a high or low-risk taker then choose an investment that aligns with you. Investing is one of the best ways to set yourself up for financial independence especially in your 20s.
Obtaining Financial Independence in Your 20s
One of the most significant advantages of being financially independent in your 20s is the freedom it provides. With fewer financial obligations, you can explore opportunities like traveling, pursuing further education, or starting a business without the constraints of debt. This independence also allows you to build a solid credit history, which can lead to better loan terms and lower interest rates in the future. Additionally, being financially independent allows you to be flexible when making life choices based on your values and passions rather than solely on financial necessity.
Achieving financial independence at a young age also sets the stage for a more secure future. It allows you to invest early, taking advantage of compound interest to grow your wealth over time. By starting to save for retirement now, even small contributions can significantly impact your financial security down the road. Moreover, being financially independent fosters confidence and resilience, equipping you to navigate life’s challenges more effectively. Ultimately, the earlier you take charge of your finances, the more empowered you will feel in shaping your future.
The bottom line is, JUST START and you’ll be setting yourself up for a bright financial future. It’s also okay to seek help from a financial advisor or even a wealth manager. Additionally, take advantage of the wealth of online resources available to you; countless articles, courses, and tools can enhance your understanding and guide you on your journey to financial independence.
