Wananchi Opinion: Financial mistakes newly employed people make that keep them poor

Getting a job and earning a steady income is an exciting milestone, especially for young professionals.

However, many newly employed individuals fall into financial traps that prevent them from building wealth and achieving financial stability.

These mistakes often stem from a lack of financial education, poor spending habits, and the pressure to maintain a certain lifestyle. The main financial traps that newly employed people fall into are as discussed below:

Living beyond their means. One of the biggest financial mistakes new employees make is spending more than they earn.

When people start earning a salary, they may feel the urge to reward themselves with expensive gadgets, dining at high-end restaurants, or upgrading their lifestyle.

This behaviour, known as "lifestyle inflation," occurs when people increase their expenses as their income grows. For example, instead of continuing to live in an affordable apartment, a person may move into a more expensive place just because they can afford the rent.

They may also buy a car on loan, thinking that monthly payments are manageable, without considering long-term financial consequences. This pattern of overspending leaves little room for savings and investments, keeping them in a cycle of paycheck-to-paycheck living.

Not budgeting or tracking expenses. A budget is essential for managing finances, yet many young professionals fail to create one.

Without a budget, it is easy to lose track of spending and end up with nothing left at the end of the month.

Some individuals also underestimate their expenses and fail to plan for necessary costs such as rent, groceries, and transportation.

Budgeting helps individuals allocate their income effectively, ensuring that they cover necessities, save for the future, and avoid unnecessary spending. Without it, money is often wasted on non-essential items, making it difficult to build wealth.

Neglecting emergency savings. Unexpected expenses, such as medical emergencies, car repairs, or job loss, can happen at any time.

Many new employees, however, fail to set aside money for emergencies. Instead, they rely on credit cards or loans when faced with financial difficulties, which can lead to debt accumulation.

A well-funded emergency savings account acts as a financial safety net, preventing individuals from falling into debt when unexpected expenses arise.

I recommend saving at least three to six months' worth of living expenses in an emergency fund. However, many newly employed people neglect this, leaving them vulnerable to financial setbacks.

Accumulating debt carelessly. Newly employed individuals often make the mistake of taking on unnecessary debt. Credit cards, personal loans, and car loans may seem convenient, but they can become financial burdens if not managed properly.

Many young professionals use credit cards for discretionary spending, such as shopping or vacations, without having a plan to pay off the balance.

High-interest debt can quickly spiral out of control, making it difficult to save and invest. Instead of using credit irresponsibly, new employees should focus on paying off existing debts and avoiding unnecessary borrowing.

If they must use credit cards, they should aim to pay off the full balance each month to avoid interest charges.

Ignoring retirement savings. Retirement may seem like a distant concern for newly employed individuals, but failing to start saving early is a costly mistake.

Many young professionals delay contributing to retirement accounts because they believe they have plenty of time to save later. However, the earlier one starts saving for retirement, the more they can benefit from compound interest.

For example, if a person starts saving Ksh5,000 per month at age 25, they will accumulate significantly more wealth by retirement age than someone who starts saving the same amount at 35.

Taking advantage of employer-sponsored retirement plans and contributing regularly can make a huge difference in long-term financial security.

Lack of Investment Knowledge. Many newly employed individuals are unfamiliar with investment opportunities and, as a result, miss out on wealth-building opportunities.

Some fear investing because they believe it is too risky, while others simply do not know where to start. As a result, they keep all their savings in low-interest bank accounts, which do not help grow their wealth.

Investing in stocks, bonds, real estate, or mutual funds can help individuals grow their money over time. While there are risks involved, learning about different investment options and starting with small, informed investments can lead to long-term financial growth.

Failing to set financial goals. Without clear financial goals, it is easy to spend money aimlessly. Many new employees do not take the time to set short-term and long-term financial objectives, such as saving for a house, further education, or a business venture. Without a plan, they tend to spend impulsively, leading to financial instability.

Setting clear financial goals helps individuals stay focused and disciplined with their money. It also provides motivation to save and invest rather than waste money on temporary pleasures.

Not seeking financial advice. Another common mistake is failing to seek financial guidance. Many young professionals rely on their own judgment when managing money, without consulting experts or doing research.

This can lead to poor financial decisions that have long-term consequences. Financial literacy is essential for wealth-building, and new employees should take the time to learn about budgeting, saving, investing, and debt management.

Seeking advice from financial advisors, reading financial books, or attending financial planning seminars can help individuals make informed decisions.

Mr. Abol Kings is a personal finance coach and a former banker