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22 May, 2023

People face various financial obligations in different life stages ranging from medical expenses to education expenses and other miscellaneous expenses. The expenses have been worsened by the high cost of living in Kenya, which has adversely impacted the financial stability and overall well-being of the people.  Despite the high cost of living, it is key to note that many financial challenges are often caused by poor financial planning.

Personal Financial Planning refers to a process that helps an individual in managing one’s finances aimed at maximizing the use of these resources in order to order to achieve financial goals and objectives. Having a sound financial plan is important because it helps reduce and possibly eliminate financial distress arising from various responsibilities and unexpected situations.

Some of the factors behind the current high cost of living in Kenya include:

  1. High Inflation

Inflation refers to the general rise in prices of commodities leading to erosion of purchasing power of money. Key to note is that when the inflation rate exceeds the rate earned on an investment, it leads to negative real returns. The headline inflation in Kenya has mainly been driven by high fuel and food prices,

  1. Currency Depreciation

Currency depreciation refers to the decline in the value of the currency of a particular country with respect to other foreign currencies. The fall in the value of a country’s currency increases the cost of importing raw materials, goods, and services, thus leading to a high production cost and high commodity prices. The Kenyan shilling has continued to depreciate against the dollar, having depreciated by 11.4% YTD in 2023, adding to the 9.0% depreciation recorded in 2022,

  1. High Taxes and increased Levies

Kenyan employees face increased pressure on their incomes due to high tax rates and increased levies, such as the recently rolled out National Social Security Fund (NSSF) deductions of 6.0%. Additionally, the recently released Finance Bill 2023, as highlighted in our Cytonn Weekly #18/2023, has various proposals for increasing taxes and levies, such as the 3.0% housing levy, which are expected to increase the burden among the Kenyan employees in the formal sector, and,

  1. Increased Interest Rates

Rising interest rates increase borrowing costs, reduce disposable income, and limit consumer spending. Notably, the continued increase in the Central Bank Rates (CBR) has led to an increase in the commercial bank’s lending rates to 13.1% in February 2023, from 12.1% seen in January 2022,

Personal Financial planning is a continuous process founded on four pillars: budgeting, saving, investing, and debt management. Achieving financial freedom can be done through the following steps:

Assessment: This step involves identifying factors that are likely to affect one’s financial plan by evaluating his/her income, spending habits, and lifestyle and see how each of them will affect their financial plan,

Goal Setting: Prior to creating financial action plans, one should outline their financial end goal. Typically, financial goals and priorities differ from person to person and, over time, influence the path one takes toward achieving their financial goal.

Plan Creation and Execution: A financial plan is a well-detailed procedure that outlines how one intends to accomplish their financial goals, how long it would take to achieve them, and the best strategy for achieving them. Execution refers to how best to put the created plan into action.

Monitoring and Reassessment: Financial planning is a continuous process because goals and priorities change over time; therefore, monitoring a financial plan for possible adjustments or reassessments is necessary. A review allows you to analyze individual investments and determine if they are helping in the achievement of your goals.

The main considerations while making investment decisions will largely depend on one’s risk tolerance and appetite. Some of the key factors likely to inform one’s individual investment decision include:

Risk Profile- Risk is the potential threat that may affect the outcome of your investments. Risk-averse individuals generally avoid riskier investments. Risk-tolerance investors, on the other hand, will channel their planning towards high-risk investments, such as real estate and equities, to generate higher returns,

Investment Goals- A person's objective will determine the type of investment they venture in; it might be long-term or short-term investments,

Income- A change in an individual’s income affects their disposable income and the amount of money they have left to invest. The investment vehicles one uses in achieving their financial goals will largely depend on their level of income,

Age- Younger people have a longer time horizon and, therefore, can make riskier investment decisions as they have time to recover if they make losses. Older people have a shorter time horizon, so they are averse to high-risk investments. Safer investment options are preferred because they offer steady and predictable income and,

Marital Status and Number of Dependents- People with few dependents have the freedom to make riskier investment decisions as compared to those with many people depending on their income. Married individuals often prioritize their families and would always look for less risky portfolios due to their responsibilities in the family.

The table below summarizes the investment allocation depending on the highlighted factors.

Investors' Age (Years)

Expected Risk Profile

Income Level

Skew investments towards


Below 25


Low to Medium

Collective Investment Schemes, Pensions, and Equities

Has a long investment horizon to withstand volatility and get enhanced returns

25- 35


Medium to high

Collective Investment Schemes, Pensions, Real Estate, and Equities

Few cash flow requirements. Still has time to withstand volatility



Medium to high

Pensions, Collective Investment Schemes, Real Estate, Equities, and Fixed Income

There are constant cash flow obligations. Still has time to withstand medium volatility



Medium to high (Generating income from prior investments)

Real Estate, Equities, and Fixed Income

There are constant cash flow obligations. Still has time to withstand medium volatility.

Above 60


Low or non-existent

REITs and Fixed Income

Stability of income is key

Financial planning is an ongoing process involving a series of decisions about how money is spent to help an individual realize the set goals in life. A person can build a plan independently or seek assistance from a financial planner if the needs are more complex. Aside from just buying products like pensions, financial planning is important for the following reasons;

Act as a guide to investment. It enables one to choose the right investment that meets their needs and objectives,

Measuring Progress. A financial plan helps an individual to track their progress by ensuring one doesn’t deviate from the plan,

Emergency funds. A well-detailed plan will enable one to set aside an investment with high liquidity, such as a money market fund or bank deposit, which will act as a safety net during times of emergency.

Defining Financial Goals – A financial plan allows you to identify your goals instead of focusing on “sideshows.” Thus, one can focus on execution which ultimately increases the chances of realizing their objectives,

Income Management – A well-detailed financial plan is key in ensuring an individual manages income through budgeting and prioritizing spending. Additionally, a good financial plan will enable one to pick out unnecessary expenses and quickly adapt to the financial situation changes, and,

Comfortable Retirement – Once individual proceeds to retirement, they will cease to generate income; however, they will need to continue to finance their expenses and other commitments. Therefore, a good financial plan will play a critical role in ensuring one has a level income enough to fund the lifestyle in retirement.

For more information, please see our report on Financial Planning Amidst Challenging Economic Environment.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice, or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.