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21 May, 2023

People face various financial obligations in different stages of their lives that range from medical expenses, education expenses and other miscellaneous expenses. Currently, the expenses have been worsened by the high cost of living in Kenya that has adversely impacting the financial stability and overall well-being of the people.  Despite the high cost of living, it is key to note that a lot of financial challenges are often caused by poor financial planning. Financial Planning refers to a process that help an individual to make sound decision about money that can help one to achieve financial goals. Having a sound personal financial plan is important because it helps reduce and possibly eliminate financial distress arising from various responsibilities and unexpected situations. As such, the purpose of this focus note is to highlight the importance of financial planning, the various considerations to make based on one’s own characteristics, needs and preferences, and some of the investment avenues available in Kenya. We shall undertake this by discussing the following:

  1. What is Personal Financial Planning?
  2. Factors Behind the High Cost of Living in Kenya,
  3. Financial Planning Process,
  4. Factors to Consider When Making Investment Decision,
  5. Investment Products in The Kenyan Market, and,
  6. Conclusion.

Section I: What is Financial Planning?

Personal Financial Planning refers to a process that help 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. Financial planning largely depends on one’s age, income level, risk tolerance, the responsibilities at hand, and future objectives. These factors have led to the broad classification of investors into three phases:

  1. Accumulation Phase: It constitutes the young population of ages 18- 30 years. Their net worth is low and restricts them to low-priced investments. They have a high-risk tolerance because of their long-term investment lifespan since a loss incurred during this phase can be recovered in the next investment cycle,
  2. Consolidation Phase: It encompasses the middle age income earners of ages 30-55 years. At this stage, the net worth of individuals is relatively high and they can afford a range of investment commodities. However, their risk tolerance is lower than that of individuals in the accumulation phase. They seek out ventures that would not imbalance their accumulated capital while still investing to offset inflationary rates, and,
  3. Spending/ Gifting Phase: Most people at this stage are retired and are of ages 55 years and beyond. Their source of income is majorly from the investments held. They have a low-risk tolerance and prefer little to no risk investments.

Section II: Factors Behind the High Cost of Living in Kenya

  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 inflation rate exceeds the rate earned on an investment it leads to negative real returns. Kenya has continued to witness elevated Inflationary pressures with the rates persistently remaining above the target range of 2.5% - 7.5% for the 11 months to April 2023 despite easing to 7.9% in April 2023 from 9.2% recorded in March 2023. The headline inflation has mainly been driven by:

  1. High fuel and energy cost: Kenya heavily rely on imported fuel to meet its energy needs. High global oil prices and transportation costs occasioned by persistent supply chain constraints and high global inflationary pressures directly impact the price of electricity, fuel, and cooking gas. These high energy costs have ripple effects on various aspects of daily life such as transportation, cooking, and heating, and,
  2. High Food Prices: The costs of essential foodstuffs in Kenya have been on the rise as a result of decreased agricultural productivity occasioned by climate change as well as erratic rainfall patterns. The increased food prices have limited access to essential food particularly by those with low incomes due to increased burden,
  1. Currency Depreciation

Currency depreciation refers to the decline in value of currency of a particular country with respect to other foreign currencies. The fall in value of a country’s currency increase the cost of importing raw materials, goods and services and thus leading to high cost of production and eventually leads to high prices of commodities. The Kenyan shilling has continued to depreciate against the dollar having depreciated by 11.4% YTD in 2023 to Kshs 137.5 as at 19 May 2023,  from Kshs 123.4 at the beginning of the year. Additionally, the shilling depreciated by 9.0% in 2022 closing the year at Kshs 123.4, from Kshs 113.1 in January 2022. The continued depreciation of the Kenyan shilling is mainly attributable to the ever-present current account deficit which was at 4.9% of GDP in 2022 given that Kenya is a net importer as well as increase in dollar demand in the market leading to further depreciation,

  1. High Taxes and increased Levies

Kenyan employees face increased pressure on their incomes due high tax rates as well as 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 of 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. Despite the taxation being essential for government revenue, high taxes and levies on goods and services continue to inflate prices and thus contributing to the high cost of living in Kenya. Further, excessive tax rates adversely impact affordability and place an additional burden on individuals and households, and,

  1. Increased Interest Rates

Rising interest rates increase borrowing cost, reduce disposable income and consequentially limit consumer spending. In 2022, the Monetary Policy Committee (MPC) increased its lending rate by a cumulative of 175.0 bps in order to anchor inflation which averaged at 7.6% in 2022. So far in 2023, the MPC has raised the CBR rate by a total of 75.0 bps to 9.5% in March 2023. 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.

Section III: Financial Planning Process

Personal Financial planning is a continuous process founded on four pillars namely; budgeting, saving, investing and debt management. The planning process considers every aspect of your financial situation and how they affect your ability to achieve your goals and objectives. Achieving financial freedom can be done through the following steps:

  1. Assessment: This step involves identifying factors that are likely to affect one’s financial plan by evaluating his/her income, spending habits, lifestyle and see how each of them will affect their financial plan,
  2. 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, influencing the path one takes toward achievement of their financial goal. Your financial planning goals should be measurable and achievable through one or a combination of the following four practices:
    • Investing - Saving and investments are frequently conflated but they are not the same thing. Saving allows you to earn a lower return but with low or no risk involved, while investing gives a higher return but at the risk of loss. Investing involves purchasing an asset with an intention of generating income in future or the asset appreciating hence being able to sell it at a profit. There are different asset classes to consider and an investor will choose them depending on their risk appetite, the returns expected and the liquidity requirement. As you invest, it is important to diversify one’s portfolio through investing in different instruments in a bid to mitigate risks,
    • Saving - Saving basically means deferred consumption and entails consuming less out of a given amount of resources in the present in order to have enough for future consumption. Consistency is necessary for effective saving.
    • Debt and Debt Management – Debt is beneficial when utilized for an investment or for future financial gain such as business, education, or property. However, it is advisable to incur debt for investment purposes only if the economic rate of return, which is simply how an investment’s economic benefits compare to its costs are able to finance the debt. Here are a few do’s and don’ts for debt management;
      1. Plan before you borrow,
      2. You should never use more than one third of your net income in loan repayment,
      3. Never borrow for things you desire but don’t need,
      4. Avoid borrowing on consumption items, and,
      5. Live within your means.
    • Budgeting – Budgeting refers to creating a plan on how to spend your money. It is important that you have the discipline to design and keep to a budget based on the resources you have. When budgeting, it is important to prioritize your needs and necessary expenses and aim to cut down on needless expenses as much as possible,
  1. 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 the goals and the best strategy for achieving those goals. Execution refers to how best to put the created plan to action. A well laid out plan should highlight the following items:
    • Suitable channels and investment instruments to achieve your goals- This involves selecting the best strategies to achieve your financial targets. This may be accomplished by prudent budgeting, cost-cutting, investing and saving, and,
    • Timelines- Your strategy should specify how long you are willing to invest in a certain investment instrument on whether your goals are long term or short term. Bonds and real estate are mostly suitable for long-term goals while money markets are suitable for short term investments, and,
  2. Monitoring and Reassessment: Financial planning is a continuous process because goals and priorities change over time and therefore monitoring a financial plan for possible adjustments or reassessments is necessary. A review allows you to analyse individual investments and determine if they are helping in the achievement of your goals. The following factors should prompt one to make changes on their financial plan during a review:
    • Status of Set Goals- Achievement of pre-determined goals should prompt you to change your financial plan. If the goals are yet to be achieved it is necessary to determine if they can still be achieved, given the present circumstances,
    • Change in Income- A change in income levels directly impacts your financial plan because it may require a change in priorities and may also lead to early maturity or a delay of set goals and therefore affect the set timelines,
    • Number of Dependents- An increase/ decrease in the number of dependents may mean that one has less or more disposable income to put into investments, and,
    • Change in Risk Appetite and Risk Tolerance- Factors such as age, number of dependents and income levels of an individual affect the risk appetite and tolerance of individuals, therefore their financial plan should adjust to suit their new risk appetite and tolerance.

Section IV: Factors to Consider When Making Investment Decision

The main considerations while making investments decisions will largely depend on one’s individual 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. Their financial planning decisions are geared towards safer investment plans and their portfolio will most likely include investment instruments such as treasury bonds, bills, and bank deposits. They can also invest in these securities through money market funds or fixed income funds. Risk-tolerant investors, on the other hand, will channel their planning towards high-risk investments such as real estate and equities, with the aim of generating higher returns,
  • Investment Goals- A person objective will determine the type of investment they venture in, it might be long-term or short-term investments. Investment goals address two major themes regarding money and money management. First, they generate accountability, forcing individuals to review progress from time to time and second, they help in generating motivation,
  • 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. Collective investments schemes allow low-income earners to gain access to various securities such as bank deposits, treasury bills, bonds, equities and structured products given the relatively lower initial investment requirement,
  • Age- Younger people have a longer time horizon and therefore they can make riskier investment decisions as they have time to recover if they end up making losses. They can skew their investments towards real estate and equities which allow the investor time to grow value in their investment. For older people, the time horizon is shorter and therefore they are averse to high-risk investments. Safer investment options are preferred because they offer steady and predictable income. Therefore, older people can have their investments skewed towards government-backed assets such as bills and bonds, which offer an almost guaranteed return after a given period. They may also invest in various collective investment schemes such as fixed income or money market funds, which are professionally managed, offer liquidity and principal protection, 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

Section V: Investment Products in the Kenyan Market

There are various investment products available in Kenyan market and their variation mainly depend on return and risk they carry.  An investor need to decide on different channels based on their risk appetite, the returns expected and the liquidity requirement. Investment products available are broadly categorized into two categories:

  1. Traditional Investments
  2. Alternative Investments
  1. Traditional Investments

Traditional investments involve putting capital into well-known assets that are sometimes referred to as public-market investments. The main categories of traditional investment products under this category include: 

  • Equities- Equities are ownership stake in a company. They are traditional investments that are relatively liquid yet highly volatile making them very risky. They provide returns in the form of dividends and capital growth, making them attractive investment option for long-term investors. To invest in Kenya’s equity market, one need to open a Central Depository and Settlement (CDS) account, which is an electronic account that holds your shares and bonds, and allows for the process of transferring of shares at the Securities Exchange through a licensed stockbroker,
  • Fixed Income- These securities which contractually provide an investor with a predetermined return in the form of interest and principal payments. They are also moderately liquid and have low volatility, hence considered less risky. They are suitable for medium to long-term investors. They include fixed deposits, Treasury bills and bonds, and commercial papers,
  • Mutual Funds- A Collective Investment Scheme that presents investors with an opportunity to participate in the various asset classes by pooling money together from many investors. The funds are managed by a professional fund manager who invests the pooled funds in a portfolio of securities to achieve objectives of the trust. The funds in the mutual funds earn income in the form of dividends, interest income and capital gains depending on the asset class the funds are invested in. The following are the main types of funds:
    1. Money Market Fund- This fund mainly invests in short-term debt securities with high credit quality such as bank deposits, treasury bills, and commercial paper. The fund is best suited for investors who require a low-risk investment that offers capital stability, liquidity and a high-income yield. The fund is a good safe haven for investors who wish to switch from a higher risk portfolio to a low risk, high-interest portfolio, especially during times of high stock market volatility,
    2. Fixed Income Fund– This fund invests in interest-bearing securities, which include treasury bills, treasury bonds, preference shares, corporate bonds, loan stock, approved securities, notes and liquid assets consistent with the portfolio’s investment objective. The fund is suitable for investors who are seeking a regular income from their investment, including those who intend to secure a safe haven for their investments in times of stock market instability,
    3. Equity Fund- This type of fund aims to offer superior returns over the medium to longer-term by maximizing capital gains through investing in listed securities. This fund is suited for investors seeking medium to long-term capital growth in their portfolios and want to gain exposure to equity investments. The fund has a medium to high-risk profile. Due to the volatile nature of the stock markets, risk is usually reduced through holding a diversified portfolio of shares across different sectors,
    4. Balanced Fund– This fund invests in a diversified spread of equities and fixed income securities with the objective to offer investors a reasonable level of current income and long-term capital growth. The fund is suited to investors who seek to invest in a balanced portfolio offering exposure to all sectors of the market. It is also suitable for pension schemes, treasury portfolios of institutional clients, co-operatives and high net worth individuals amongst others. The fund is a medium risk fund and has a medium risk profile, and,
    5. High Yield Fund – This type of fund invests in securities that generally pay above average interests and dividends, with the fund’s objective being delivery of high returns to investors. The fund has a high-risk profile and is suited for long-term investors who are looking for growth of their portfolio’s over-time.
  1. Alternative Investments

Alternative investments are those that fall outside the conventional investment types such as publicly-traded stocks, bonds, and cash. The most common alternative investments today are:

  • Real Estate - This involves investment in property and land. Real Estate is considered an alternative investment that is illiquid, relatively stable and uncorrelated to traditional investments. They are suitable for long-term investment plans, which makes them a risky investment. Real Estate can yield high returns, and is useful for diversification and as a hedge against inflation since its value increases over time. Real Estate offers returns in the form of rental yield and price appreciation, and,
  • Private Equity - It generally involves buying shares in companies that are not listed on a public exchange or buying shares of public companies with the intent to make them private. Private equity can involve many strategies that may help provide money to companies at different stages of their development. The most widely used strategies are venture capital, buyouts and distressed investing.

In determining the appropriate investment option, one should consider:

  • Liquidity needs and time horizon for investment- The liquidity varies from one asset to another. An individual must evaluate the target for the investment chosen and the length of time they for which they require illiquid assets,
  • The rate of return- A rational investor seeks out a venture that would provide maximum return for a given level of risk,
  • The cost of the investment- One should harbor the same sentiments in purchasing an investment as they do in buying groceries. The price of the investment is a key element. Over time, the returns received should exceed the cost of the investment, and,
  • The regulatory and legal constraints placed on the venture- Awareness of the tax treatments that the selected investment options are subject to assists one in evaluating their longstanding returns.

Section VI: Conclusion

In conclusion, financial planning is an ongoing process that involves a series of decisions about how money is spend in a way that can help an individual realizes the set goals in life. A person can build a plan on their own or seek an assistance from a financial planner if the needs are more complex. Aside from just buying products like pension, financial planning is important for the following reasons;

  1. Act as guide to investment. It enables one to choose the right investment that meet their needs and objectives,
  2. Measuring Progress. A financial plan helps an individual to track their progress, by ensuring one doesn’t deviate from the plan,
  3. Emergency funds. A well detailed plan will enable 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
  4. Defining Financial Goals – Having a financial plan allows you to identify your financial goals as opposed to focusing on “side-shows”. Thus, one is able to focus on execution which ultimately increases the chances of realizing their objectives,
  5. Income Management – A well detailed financial plan is key in ensuring an individual manage 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,
  6. Comfortable Retirement – Once individual proceeds to retirement, they will cease to generate income, however, they will need to continue finance their expenses and other commitments. Therefore, a good financial plan will play a critical role in ensuring one have a level income enough to fund the lifestyle in retirement.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, 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.