How to prepare a financial plan based on the current Kenyan economy

November 4, 2022

The Kenyan economy is currently going through a downturn that is touching on all aspects of Kenyan life. Inflation is touching double digits in 2022 and is expected to worsen before the year ends.

When faced with uncertainty in the coming months one should prepare their finances to take advantage of every shilling that passes through their pocket. This can be achieved through a well-thought-out financial plan.

What is a personal financial plan?

A financial plan is a written document showing one’s current financial situation, financial goals, and how to achieve those goals. It puts into perspective the current cash flow from income. Everyone has an idea of what they expect to get from their earnings but few articulate a step-by-step roadmap on how to achieve their goals with their current and future earnings. 

It is the job of a financial plan to give guidelines on how to fit your goals into your current and future income.

 

What are the main components of a personal financial plan based on the Kenyan economy?

A good financial plan needs to be a simple document you can understand and follow easily and accurately. There are some components that each personal financial plan must have. This include: 

  • Financial goals

A good financial plan should show what you expect from your money. These are the realistic goals you have set for yourself and how much they are likely to cost you to achieve them. The financial goals should have a rough estimate of how long you expect to accomplish this goal. This will push you to be more proactive in accomplishing them.

Financial goals should be realistic and reflect the current trajectory of your income. Financial goals that don’t take into account earning potential are likely to fail due to the constrain burden they will cause to your income cash flow.

Keep them simple and realistic and you will be far much likely to accomplish them within the set timeframe.

  • Statement of your net worth

This is an audit of what you own currently. You need to evaluate the net worth of all your assets. To determine the worthiness of an asset you have to calculate the current market price of that item. If you found a willing buyer for the asset how much will you sell it for? 

To get a statement of net worth you first have to take a full inventory of all your assets and write them down.

Next research the current market value of your fixed assets. This is not difficult since you will need to find a current sale of the same and compare the two. 

Finally, determine the value of your intangible assets. Be careful to ensure you don’t undervalue intangible assets due to the lack of a standardized valuation method for them.

Now that you have the value of your assets, write down all the sources of all your income and get a monthly average if it varies from time to time. Next, take account of all your debt and write them down and total them.

At this point, we can get the total value of our net worth by subtracting the net debt from the total assets. If the process is too tedious for you you can use online net worth calculators.

  • Analyze your cash flow

Like any other business that has an income, a person’s earnings are no different. You might have more than one source of income and it’s important to understand how much they bring on average each month. It will give a clear picture of where you stand financially. Income includes:

Salary

Dividends from stocks and business profits

Life insurance

Once you have your list you need to calculate the net income. This is the total amount earned in a specific period minus interest, taxes, and expenses. If you had any asset sold within the same period you should include it in the analysis since this is part of your income.

Before starting to make the financial plan you must understand why you are making it. It is often an overlooked aspect of financial planning that few seem to take into account.

Understanding why money is important to you 

Before I start rattling strategies like an overzealous sales rep I could like to pose this question to you, why is money important to you? I know this might seem like a very obvious question after all poverty is the enemy. Rather, it is the way the question is answered that made me bring it up.

When asked this question most people will give you an offhand answer like freedom or escape poverty. 

This is not enough since it does not give a specific problem you are trying to solve. Let’s be honest, a financial plan is aimed at solving a problem. I believe the more specific and honest you are with the end point of the plan the better you will be at executing it.

Money is an instrument. On its own, it has no use till you exchange it for the item or service you need. You don’t pay for a tool unless you have a specific use for it. Moreover, we can have the same tool but apply it to different uses. This is why your financial plan can never be the same as mine even though we are using the same tool to try to execute it.

A financial plan with a well-defined why will ensure that you use the tool to solve the problem it was intended for. It will translate to keeping yourself disciplined to follow through with what you have planned. 

Discipline is a major factor in achieving the ambitious goals you set for yourself in the financial plan. Why not make it easier for yourself by having a well-articulated reason that will act as your guardrail when you feel overwhelmed with the execution plan? Keep this in mind when you try to answer this question.