The road to financial freedom

You are planning your personal finances, but will your plans be successful or will they flop? writes ANTONY NGATIA

Personal financial planning is the process of developing and implementing a comprehensive plan to meet financial goals, improve financial well being, and prepare for financial emergencies, creating financial health, and happiness.

Financial health is the overall welfare of a person’s finances. It includes, among others, a lack of crippling debts, adequately diversified income base able to guarantee income even in case of a job loss, and ability to meet financial demands of an emergency.

A survey by Pew Research Centre shows that happiness and money are co-dependent. People with higher incomes and healthy financial standings are generally happier than those with lower incomes. And happiness is a predictor of good physical health, since sufficient money means there is no need to worry. Worrying increases stress, which in turn, increases the likelihood of diseases.

It is very important therefore to know the factors that influence personal financial planning. Having a realistic view of a situation solves half the problem, especially when it comes to tenacious money matters. After you have defined success in your terms, define your planning process, by identifying and prioritising specific goals and objectives.

But before you that, you have to factor in various factors.

Where are you?

First of all, find out where you are in your lifecycle. Every phase in our lives has its own challenges. Before you are 20 years old, your money (belonging to others) is spent on education. Usually, you have limited capacity to earn, meaning you are a net debtor.

From late 20s to 30s, all the way to 40s, marriage, career development, home purchase, investment in children’s education are some of the major issues with major financial consequences. A person at this phase might find it difficult to meet these challenges and save for the future at the same time. Children’s education, for instance, might distort, or even frustrates, one’s saving plans.

Financial experts, however, maintain that the demanding financial responsibilities need not restrain your from investing for the future.

"You can adopt a passive investment strategy where you buy stocks of preferred companies from time to time," says Samuel Mwangi, an accountant.

And although they require much money to invest in, bonds are also the right vehicles to invest in for people in their 20s and 30s, whose primary financial goal is to maximise capital.

Apart from saving and investing, the greater focus also lays at protecting family against misfortunes such as job loss due to illness and disability, which necessitate insurance.

The late 40s marks the beginning of the wealth accumulation phase, as children are clearing college and there is much more money freed for saving.

saving necessary

All through 50s to around 60s, when retirement comes, saving is necessary as health needs increase, and concern for wealth preservation for heirs gains urgency.

The second factor influencing personal finances planning is family composition or life situation. This refers to marital status, age, education and income.

A household with school and college-going children will spend more on education and save less. But couples without children are likely to focus on their career development, and therefore climb up the employment ladder quickly, and consequently get higher incomes.

Moreover, well educated individuals, and with higher incomes, but without children, are more likely to be risk takers. Individuals with specialised skills from college normally get employment earlier, start off with big incomes and are likely to be assured of retirement benefits.

The third factor is one’s attitudes and values regarding money. What do you think is most important? Is it family, job, education, possessions, faith, or financial success? The weight you place on each influences the goals and strategies you set.

Your attitudes will also factor in your decisions. Some people are optimists, others pessimists. Some are risk takers others risk averse

From the recent global financial crisis, we now understand just how unpredictable the world economy can be. Not even experts can predict tomorrow’s economic conditions.

However, a number of economic factors are likely to influence one’s financial planning and it’s important to recognise and incorporate them in our planning.

Inflation is a sudden increase in prices of goods and services and loss of purchasing power of money over time. To maintain current lifestyle with a rising inflation rate, you must raise your income to cover the erosion of monetary value.

If inflation rates stand at eight per cent, then the investment return rates must surpass eight per cent.

Interest rate is a measure of one’s earnings or return on an investment. Some personal finance writers have simplified it as the cost of spending today instead of saving. Like other goods, interest rates follow the law of supply and demand. When there is high demand for credit in an economy, rates go up and vice versa. In case you borrow money, you should invest where the rate of return is higher than the interest rate on the credit facility.

ups and downs

Employment is characterised by ups and downs. In periods of economic growth (boom) many jobs opportunities with better pay crop up. During the periods of recession or economic slowdowns job cuts occur. Those people who remain in employment earn little. A sound financial plan should take into account this reality.

"You can mitigate the worst financial crisis by ensuring you have an emergency fund equivalent to six months of your monthly expenditure," says John Kihanda, an accountant.

Some financial experts advise that for one to forestall uncertainties related to employment, having professional skills that are likely to be in demand even during the lean times is prudent.