Planning for Financial Security
By James Emp 

Different countries have their own social customs, economic organization and financial systems. Each society has its own beliefs and values that determine the way its people interact, lead their lives, conduct business and keep their wealth. 

In view of these differences financial advisers have a clear responsibility to be fully aware of the law, taxation system and investment products of the country in which they operate. This enables the advisers to identify the best financial plans to meet their client’s needs correctly. 

However, certain financial needs and financial planning concepts are universal and apply across all geographies. The general principles therefore guide investment advisers in the various jurisdictions in which they operate.

Financial planning is the process of making in advance, provisions for financial needs that will arise in the future. This is done by spreading your current income, and placing some of it in the right investment vehicles, to be available when needed in the future to achieve an individual’s financial objective. Some of the future financial needs that should concern you now include the availability of adequate income for your retirement, or income for your family in the event of your premature death. 

People who are already wealthy may need to take financial planning steps now to ensure that their assets, including family businesses, pass without difficulty or additional charges from taxation to their chosen heirs. 

In its simplest, financial planning plans means making contributions into a suitable financial product and making clear who will benefit from it. More complex plans involve detailed knowledge of law, taxation and investment principles. Importantly, the correct financial products and techniques can help reduce the amount of tax their investors have to pay. 

Financial planning is very important for both private individuals and for businesses. It covers a wide and diverse scope of services such as: 

• The provision of family income in the event of the income providers’ illness or death
• The accumulation, preservation and investment of wealth
• The survival of businesses from one generation to another.

Good financial planning is therefore necessary if people and businesses are to achieve their financial goals in life. Financial planning makes a considerable contribution to the sum of human happiness and in many countries can help make considerable tax savings in a lawful way. 

Financial planning needs vary from person to person and most have several different financial needs at the same time. These needs fall into two broad categories: the need to provide for predictable events and the need to provide for unpredictable events. 

Predictable events require the accumulation of money for a specific purpose within a given timescale. Some examples include a person who has to repay a large debt at the end of 10 years and must have money ready at the repayment date. Another person may decide that he or she will retire at age 60 and can identify an amount of income he or she will need in retirement. Parents know the ages at which their children will start each stage of their education and can estimate how much money might be needed at each stage. 

Most financial plans to meet such predictable needs will be designed to produce money during an individual’s own lifetime. This requires investment from income or from capital products to produce the required money by the required time. 

Most of these needs that can be predicted require a medium to long-term investment period. However, there are short-term savings needs, such as the need for a young couple to save rapidly to set up a home or build a small emergency fund. You should note that the investment considerations for short-term savings are very different from those of the longer term investments. 

There is need to build flexibility into financial plans so that plans can be changed as the circumstances dictate. People need flexibility to be able to increase or decrease benefits or contributions without additional charges or penalties. They need flexibility to be able to change beneficiaries of existing plans in the event of marriage, divorce or birth of children. They may need the facility to change investments and / or suspend contributions during a period of unemployment or business losses. Careful choice of investments should ensure that people forced to abandon their plans still receive a reasonable return on the money already contributed. 

An unpredictable event is one that may occur at any time, or may not occur at all. Typical examples of unpredictable events important financial planning include: 

• Long-term sickness and disability
• The onset of a critical illness
• The death of a parent before children have grown up
• Unemployment

Some people will be victims of one, or even all, off these events, others will escape them (except death) all together. You may not know in advance, and indeed there is no way to know who will suffer or when they will do so. However, when these events occur, they can bring financial disaster to the unfortunate individuals and their families. This spells out the need for all individuals to protect themselves against these risks and to see that the benefits provided are large enough for their family’s needs. 

Insurance policies that cover the risks of death or disability are known as protection polices. They meet the needs of individuals, their families and creditors to be financially protected against the effects of the individual’s illness or death, although they do not build up a personal investment for the policy holder. 

One of the core principles of financial planning priorities is that people should make provisions for the unpredictable protection needs before allocating money for investment needs. The two reasons for this are first, that ill health or death can reduce a family to serious poverty and misery. Secondly, an unpredictable event could happen tomorrow. This increases the urgency of dealing with the need. 

In conclusion, financial planning needs to persist throughout your life and most people have at least one unsatisfied need. Most people will have both protection needs and investment needs simultaneously throughout their lives. However, priority of needs change as people grow older and personal circumstances change. We will explore this train of thought in the next article. 

(The writer is a financial planning adviser with a leading bank in Kenya) 


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