SETTING UP A FINANCIAL LIFE

Many people don’t know how to set up their finances. Here’s a step by step guide on how to set up your financial life. We will cover: • Debt management • Emergency fund • Sinking fund • Health Insurance • Retirement planning • Asset Allocation 1) Get good at managing your money. Create a working budget and a system to track your expenses. If you don’t tell your money where to go (via budgeting), you will always wonder where it went. Tracking your expenses helps you learn about your spending habits and budget better.

2) Get good at saving Forget the ‘save 10% of your income’ or whatever saving challenges you’ve heard of. The best way to save money is to save as much as you can and when you can. Our incomes and expenses aren’t static. Our incomes and expenses aren’t static. They keep on changing and so should our savings.

3) Build a month emergency fund Figure out your normal monthly expenses and save that money as your emergency fund. This is your backup incase of any financial emergencies. When getting started, a 6 months emergency fund may not make sense.

4) Get Health Insurance cover Your health and that of your loved ones is arguably your most important asset. Medical bills can drain your account very quickly. (Check out my article on Health Insurance in Kenya)

5) Getting out of debt If you are in debt, it’s wise to come up with a debt management plan. Debt consolidation can be a great tool if you are stuck in too many loans. Don’t use all your savings to clear your loans, a financial emergency may happen and force you to borrow.

6) Emergency Fund and Sinking Fund You can now ramp up your emergency fund to 6 months and create a sinking fund. This will help you manage short term expenses and financial emergencies without having tp take loans. (Check my article on Emergency & Sinking Fund)

7) Investing With the basics covered, you can now move onto investing. Here you can split your extra money into a few accounts depending on your investing goals and risk appetite. Here are some options: I prefer saving in a Money Market Fund first to accumulate enough money to move into other investments. You can have 2-3 MMF accounts for your emergency, sinking fund, and investing purposes. Once I hit the intended amounts, I then move the money to various asset classes.

8) Asset Allocation Even if you are a newbie investor, I believe it’s easier to get started with classes like ETFs, SACCOs, and Treasury bonds. These are low risk avenues that can earn you good returns with you doing nothing, just investing and waiting.

9) Just Keep Buying From here onwards, you just keep buying cash producing assets. You should continuously buy assets like you buy food or pay rent.

10) An Experiences Portfolio This is where you can use money to buy happiness. This is where you save money for holidays, travel, and any other experiences that make you happy. (I talked about this in its article)

11) Retirement Planning With a well-diversified portfolio, you can calculate how much you need to retire based on your projected expenditure. If not, you can join a private retirement scheme and make contributions. (For detailed information check an article on Retirement Planning in Kenya)

NB: Bank’s savings account, and fixed deposit accounts are not investments. Your money can earn better returns in other avenues. By Fidel.

© FINANCIAL INVESTMENT BUSINESS ANALYST.