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Article on Personal Finance Planning
1. Article on Personal Finance Planning
Personal finance is the financial process which an individual performs to budget, save,
and spend monetary resources over time, taking into account various financial risks and
future life events.
The individual considers various aspects of financial forecast, which are both for saving and
spending. The saving aspects may include, Savings account with Banks, Sacco, Insurance
Companies, Stocks, and Government Bills etc. This is very key to achieving the objectives of
the financial forecast.
Personal financial planning process
The key component of personal finance is financial planning. This is a dynamic process that
requires regular monitoring and re-evaluation.
In general, it involves the following steps
1. Assessment: A person's financial situation is assessed by compiling simplified
versions of financial of financial affairs of the person. This is a list of
personal assets (e.g., car, house, clothes, stocks, bank account), along with
personal liabilities (e.g., Mshwari Loan, Sacco Loan, Personal Debts, bank loans,
mortgage). When the Liabilities are deducted from the Assets, the net is the Net
Worth of the individual. A personal income statement lists personal income, which
may include the salary, business income, interest earned etc and expenses, which
may include School fees, rent payable, interest on loan, personal expenses etc.
When expenses are deducted from Income, the net is the profit/ (loss), which is
added or deducted from the Net-worth in the balance sheet
2. Goal setting: This may include a mix of short- and long-term goals. For example, a
long-term goal would be to "retire at age 50 with a personal net worth of
Kshs.500,000," while a short-term goal would be to "save up for a new computer in
the next month." Setting financial goals helps to direct financial planning. Goal
setting is done with an objective to meet specific financial requirements.
3. Plan creation: these are the details of how the individual intends to achieve the
financial goals. It could include, for example, reducing unnecessary expenses,
increasing the employment income, or investing in the stock market.
4. Execution: Execution of a financial plan often requires discipline, patience and
perseverance. This is where most of us fail. Without the needed discipline, the plan
will undoubtedly fail.
5. Monitoring and reassessment: with progression in time, the financial plan is
monitored for possible adjustments or reassessments. These may include realigning
the plan to suit present financial situation, dropping the non-beneficial goals, etc.
2. Areas of focus while Planning Finances
The Five key areas of personal financial planning are:
1. Financial position: is concerned with understanding the personal resources
available by examining net worth which includes the net cash flow. From this
analysis, one can determine to what degree and in what time the personal financial
goals can be accomplished.
2. Adequate protection: the analysis of how to protect against unforeseen risks.
These risks can be due to liability, property, death, disability or health. This is
usually in form of Insurance.
3. Tax planning: typically, the income tax is the single largest expense. Managing
taxes is not a question of whether or not taxes will be paid, but when and how
much. There are various tax incentives in the form of deductions and credits, which
can be used to reduce the tax burden. Typically, as one's income grows, a
higher marginal rate of tax is payable. Understanding how to take advantage of the
myriad tax breaks when planning one's personal finances can make a significant
impact. These may include saving through Pension schemes, where your income is
allowable upto Kshs.20,000 per month, investing in capital items, upon which their
sales do not attract capital gain taxes at the moment, offshore investments etc
4. Investment and accumulation goals: planning how to accumulate enough money
for large purchases and life events is what most people consider to be financial
planning. Major reasons to accumulate assets include, purchasing a house or land,
starting a business, paying for education expenses, and saving for retirement.
Achieving these goals requires projecting what they will cost, and the timing of
when one needs to commit funds. A major risk to an individual to achieving their
accumulation goal is the inflation which is unpredictable. To overcome this rate of
inflation, the investment portfolio has to get a higher rate of return than the
inflation rate. Thus the choice of investment must be prudent and risks associated
must be considered.
5. Retirement planning is the process of understanding how much it costs to live at
retirement and coming up with a plan to distribute assets to meet any income
shortfall. Methods for retirement plan include taking advantage of government
allowed structures to manage tax liability including: Pension Schemes, Home
ownerships, acquiring capital items which can be sold at a profit in the latter years,
investing in farming, or business ownership etc.
CPA Jesse T Mahianyu