Many people aspire to achieve financial wellness but struggle to find the right starting point. They often rush into financial investments without first building an emergency fund. As a result, when unexpected events arise, they are forced to liquidate their investments to cover emergencies, undermining their financial goals. In this article, I’ll guide you through an 11-step process to set up a solid financial foundation—from managing your money to investing and planning for retirement.
I. Master Money Management
The first step towards financial wellness is creating a practical budget and a reliable system to track your expenses. Without a clear plan (budget), you’ll constantly wonder where your money has gone. Tracking your costs reveals your spending habits and helps you refine your budgeting skills for better financial control.
There are a myriad of apps and software (both free and paid) that you can utilize to create budgets and track your spending. From my experience, using apps to do this is better than using spreadsheets. This is because you have your phone all the time and you even get reminders to track your expenses. For starters, I’d recommend this Money Manager App that you can download on your app store.
II. Become Skilled at Saving
Forget rigid rules like ‘save 10% of your income’ or popular saving challenges. The best approach is to save as much as possible whenever you can. Since our incomes and expenses fluctuate, your savings strategy should adapt accordingly.
III. Build a One-Month Emergency Fund
Begin by calculating your regular monthly expenses and setting aside that amount as an emergency fund. This serves as a crucial financial cushion for any unexpected situations that may arise. While many recommend having a six-month emergency fund, starting with just one month is more manageable and practical when you’re getting started.
It’s better to take gradual steps rather than feel overwhelmed by larger savings goals. Once you have the one-month fund secured, you can gradually work towards increasing it.
IV. Get Health Insurance Coverage
Your health, and that of your loved ones, is one of your most valuable assets. Medical expenses can quickly deplete your savings, leaving you in financial distress. Securing health insurance helps protect against unexpected medical costs, giving you peace of mind and financial security.
V. Getting Out of Debt
If you’re in debt, it’s crucial to develop a solid debt management plan. Debt consolidation can be a helpful strategy if you’re juggling multiple loans, as it simplifies payments and may lower interest rates.
Moreover, debt management methods like the Debt Snowball and the Debt Avalanche can be helpful to help you become debt-free.
However, avoid using all your savings to clear the debt—having no financial buffer could leave you vulnerable in case of an emergency, forcing you to borrow again. Balance debt repayment with maintaining a safety net.
VI. Emergency Fund & Sinking Fund
Once you’ve established your initial emergency fund, it’s time to grow it to cover six months’ worth of expenses. Additionally, create a sinking fund to manage short-term expenses or planned purchases. These funds will help you handle unexpected financial emergencies or anticipated costs without the need to rely on loans, keeping your finances stable.
VII. Investing
With your financial foundation in place, you can now shift focus to investing. Allocate your extra funds across different investment accounts, tailored to your specific goals and risk tolerance. This approach allows you to grow your wealth over time while balancing potential risks and rewards.
Before diving into other investments, I prefer saving in a Money Market Fund (MMF) to accumulate sufficient capital. You can open 2-3 MMF accounts designated for your emergency fund, sinking fund, and investment purposes. Once you reach your target amounts in these accounts, you can then allocate the money into various asset classes, allowing you to invest strategically and with a stronger financial base. For recommendations on MMFs, check out my article How Kenya’s Top Money Market Funds Compare.
VIII. Asset Allocation
Even if you’re new to investing, starting with low-risk asset classes like ETFs, SACCOs, and Treasury bonds is a smart move. These options offer a balance of safety and returns, allowing your money to grow with minimal effort. Simply invest and let time do the work for you—no need for constant monitoring or active management.
Please note that bank savings accounts, fixed deposit accounts, education policies, and endowment policies are not considered investments. Your money typically earns better returns through other investment avenues. My article, A Simple 5-Year Plan for a Profitable Investment Portfolio, covers the basics of investment asset allocation.
IX. Just Keep Buying
Investing is a long-term game. Continue to invest in cash-producing assets consistently. Treat your investments as you would essential expenses—like paying rent or buying food. Regularly adding to your asset portfolio ensures steady growth and helps build long-term wealth.
X. An Experiences Portfolio
At this stage, you can allocate funds for enhancing your life experiences. This portfolio is dedicated to saving for holidays, travel, and other activities that bring you joy and fulfilment. It’s a way to invest in your happiness and create lasting memories.
XI. Retirement Planning
With a diversified portfolio, you can estimate the amount you’ll need for retirement based on your projected expenses. If you’re not yet confident in your investment strategy, consider joining a private retirement scheme and making regular contributions. This ensures you’re building a secure financial foundation for your future. For more on retirement, read the article Retirement Ready: Essential Steps to Build Your Financial Future.
By following these steps, you’ll establish a strong financial foundation. Achieving financial wellness involves prioritizing money management, building emergency and sinking funds, and investing wisely. Adapt your strategies as your circumstances change and balance investments with health and future planning. With careful planning and consistency, you’ll navigate financial uncertainties and move towards a stable and prosperous future.