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Roadmap to financial freedom in 2019

Hellen Njeri @PeopleDailyKE

Did you make New Year’s resolutions for 2019? Considering that the most common topics touch on health and finances, there’s is great possibility that at least one of them involves a financial goal.

Unfortunately, chances are any resolution we make will not be kept. Here are some ways to make sure that you at least keep your financial ones:

-Set smart goals

When you set a vague goal like “save more money” or a seemingly insurmountable one like “pay off all debt,” you’ve already set yourselves down the path to failure. Instead, you want your goal to be Smart: specific, measurable, attainable, realistic, and time-sensitive. Instead of “save more money,” a Smart goal might be to save an extra Sh15,000 for emergencies every end month.

-Determine how you will invest for each goal

For your goals to be funded within the next five years, you’ll want to keep your money somewhere safe like a bank account or stable value fund that just earns interest and doesn’t fluctuate in value. That’s because if you invest the money in something more aggressive like stocks, it could lose value and not recover by the time you need the money.

The benefit of a higher return is also much less when the money has such a short time to compound. For longer term goals, it probably makes sense to take some investment risk. Otherwise, you face the risk of having your purchasing power reduced by inflation. A one per cent return with two per cent inflation is actually losing one per cent a year in real terms of what you can buy with that money.

-Calculate how much you need to save per month

For debt, you can calculate to see how quickly you can be debt free by making extra payments. For other goals you’re saving for, don’t forget that the cost of your goals will likely increase over time due to inflation.

For goals like saving for a down payment on a home, you can also calculate to see how much you need to save per month given a certain inflation rate and return on your savings. Also calculate for retirement and college expenses. Just remember to use expected rates of return that match your time frame and risk tolerance.

Take advantage of taxes to make savings

Some examples are your employer’s retirement plan and life insurance covers. All these have tax advantage which can be claimed while filing your tax returns. Some of these rewards can amount to huge sums of money making meaningful impact on your savings.

-Minimise your investment costs

Within each account, look for the lowest cost options to implement your investment allocation based on your time frame and risk tolerance. Studies have shown that when comparing similar investment scenes. Also, look for a bank with the lowest charges.

-Automate your saving plan

This is the most important step because you can have perfect goals, perfect plan, perfect account, and perfect investments but they won’t mean anything without actual savings. By automating your savings you are guranteered not to spend the money. You can do this by payroll deduction or automatic transfer from your bank account through a monthly standing order.

-Adjust as needed

Once a year, you’ll want to revisit your goals, re-run your calculations based on your actual investment returns, see if tax laws have changed, and re-balance your investment portfolio.

If your investments are down in value, this is not a reason to change them but just a natural part of the cyclical nature of investing.

No investment fund consistently outperforms all the time but you’ll maximise your odds by keeping your costs as low as possible.

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