It is in everyone's dream to build wealth and maintain a stable financial future, free from life worries. Suze Orman, an American financial advisor, says when you reach a point when your heart and mind feel free from the ‘what-ifs of life’, then you are financially healthy.
Financial health is critical to your mental, physical, psychological and social well-being. If a person is not financially stable, they may develop financial stress. This state of mind could lead to depression and other health issues.
Most Kenyans have not yet achieved financial health and the growth path was disrupted by the impact of the COVID-19 pandemic on the economy. According to a survey conducted by GeoPoll, a research company, Kenyans suffered more from financial and emotional stress, built up from the onset of the pandemic in 2020 compared to other African Nations.
Another report released by Deloitte in April 2022 shows that financial health in Kenya has been deteriorating for the past five years. The report cited a lack of knowledge by a majority of Kenyans to manage their money and finances effectively. It also stated that most Kenyans are not financially resilient.
In this article, you will learn about financial health in Kenya and what you can do to keep your financial resilience in 2022.
Financial health is defined as the dynamic relationship between the financial and economic resources an individual possesses, that can impact the person’s physical, mental and social well-being.
In simpler terms, financial health refers to the level an individual can meet all their current needs comfortably and has the resilience to maintain the same state in future.
It is a person’s savings - how much are you setting aside, investment and expenditure - if you are able to meet your expenses without any constraints.
Individual financial health is measured by how well you are prepared to meet different financial needs. These needs include your expenses on food, basic items, education, and emergencies like medical bills.
Check whether you are able to balance your income, and expenses, and manage your day-to-day operations. Measure your ability to deal with risks like debts, emergencies, and financial shocks like pay cuts or loss of a job.
Assess your savings and ability to invest. Does your income balance between expenditure and savings? Are you at par with your financial goals, plans and priorities? Check whether you have or are able to build financial reserves like savings, investments and emergency funds.
The Deloitte survey showed that financial health in Kenya dropped from 39.4% in 2016 to a low of 17.1% in 2021. In 2019 it stood at 21.7%. The report cited limited knowledge of financial management among Kenyans.
But what is the main cause of poor financial health? Well, keep reading for more insights.
A lack of comprehensive knowledge of how to manage money effectively can lead to reduced financial health. The Kenya National Bureau of Statistics (KNBS) 2019 report indicated that only 2.8% of Kenyans rely on an expert and formal institutions for financial advice, compared to 88.3% who rely on themselves and friends/relatives.
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Lack of a budget or plan on how to use your finances negatively impacts your financial growth. A budget defines how you can use your money, balancing between your income, expenditure and investment. With a clear budget, you get to know your financial status and prepare for meeting uncertain expenditures like emergencies.
Financial advice is significant to financial growth and stability. You could be earning more money, but your growth can be inhibited if you do not have access to quality guidance on where to put your money.
To achieve financial health as an individual, you need to take note of key factors surrounding your personal finances. These include budgeting, savings, expenditure and investment. You should also take note of various financial risks and unexpected expenditures like emergencies.
The following steps should help you achieve financial health:
Tracking your financial status involves keeping tabs on your income and spending. This can ideally be done on a daily basis or monthly. Track your expenses by keeping receipts, invoices and payment transactions.
Understanding your financial status is important in measuring your financial stability. This gives you an overview of your sources of finance, how much you can spend, and if you have been able to save for investment and emergencies.
Read Also: How to Do a Complete Financial Self-Audit
A personal budget is a summary that compares and tracks your income and expenses for a specific period, usually one month. It shows the amount of money you receive as income and how you can spend it. When you track your income, you should plan how you will spend it, including savings, expenditure and investments.
Saving money is a key component of a budget or financial plan. You could save for a specific goal - short term or long term - and endeavour to achieve it. This could be saving for school fees, buying a house or plot, vacation/holiday, and investment.
As Warren Buffett notes, “Do not save what is left after spending, instead spend what is left after saving.” The budget should first guide you on a savings plan before expenditure. This will help you improve your financial status.
Read Also: 6 Simple Steps to Create a Working Budget
Managing debts involves planning or budgeting to get your debt under control. The strategies you set help you lower your debt levels and eliminate them completely. These strategies could include improving your cash flow, reviewing and prioritising debt payments, tracking your credit score and consolidating where possible.
Assess your ability to repay debts owed to creditors. Have you been responsible? Are you likely to continue servicing your debts in future? If your score is high, then you could qualify for loans with lower interest rates. To increase your credit score, you should always make your repayments on time.
Building wealth is a process that involves generating long-term income from multiple sources. These can be passive or active investments.
The passive investments include the Stock market, Sacco shares,, Government bonds, Pension, Land/plot, Real Estate, and asset building such as digital products e.g ebooks, Youtube, podcasts and affiliate marketing.
Where can you raise money for wealth creation? Whether you are employed, self-employed or doing business, you can raise revenue to start investing in either active or passive income sources. You could as well build wealth using other people's money.
Emergency savings involves stashing money away for use at a later date to meet emergencies like medical bills, home repairs or car service and unemployment. An emergency fund improves the financial security of an individual.
Plan on emergency savings by setting aside a certain percent of your salary per month - the rule of thumb is to build up savings equal to 3-6 months’ worth of expenses. Emergency funds reduce the need to go for high-interest debt options such as some unsecured loans.
Financial resilience refers to the ability to withstand economic challenges. The challenges could result from government policies, natural disasters, and health-related issues like the COVID-19 pandemic.
Financial stability enables an individual to cope with stressful life events like unemployment, disability, divorce and emergencies. Below are some tips to help you maintain financial stability.
This involves spending less on your lifestyle compared to your income. This makes you financially responsible, which is a significant step in building financial stability.
You should go back to the drawing board, analyse your sources of income, know how much you earn, budget your expenditure to fit your income, and look for ways to boost your income like side hustles or part-time jobs.
Set up a savings plan and avoid trying to keep up with your neighbour. Keep your finances on track to see whether you are meeting your goals and always remember to plan on emergency funding.
Unnecessary expenses refer to when you spend money on personal wants like entertainment, holiday, eating out in restaurants and purchasing luxury things too often. It is not bad to treat yourself but you ought to consider your income.
Analyse how much you are earning. Check whether you have a saving and spending plan. If your salary is still accommodating, then you can afford some luxury spending, but before that, cut on this kind of spending.
Financial health can be achieved through proper knowledge and understanding of personal wealth creation and growth. This article gives insights on financial health, stability or resilience and how to attain it.
The foremost step to financial health and stability is planning and budgeting, which could give you the direction to other steps relevant for the journey to be a success.