Locally and internationally, each country’s government policies are revised to keep up with current trends and needs.
How do economic government policies, for example, tax reforms, interest rate adjustments, minimum wage reforms, and inflation influence how much we earn, save, and spend? How these policies affect personal finances is more important now than ever, whether you are a salaried employee, student, minimum wage worker, or business owner.
Tax changes have the most direct effect on your income from tax rates, tax cuts, tax levies, and value-added tax (VAT). For salaried workers, an increase in income tax rates reduces the net salary.
For business owners, changes in corporate tax can alter profitability, affecting decisions on investment, pricing, and hiring. An increase in VAT, as an “invisible tax” that is embedded in almost any purchase you make, raises the prices of goods and services.
Reduced take-home income and reduced profits are most likely to affect personal finance decisions. Households are forced to make tough economic choices because every penny taxed is a penny not spent, a penny not saved, and a penny not invested.
Finally, levies can have similar effects to taxes, for example the Kenya’s Affordable Housing Levy introduced in 2024, which deducts 1.5 percent of an employee’s gross salary to fund public housing, reducing take-home pay, forcing households to adjust their financial priorities.
Interest rate adjustments
Interest rate adjustments are a key tool used by central banks, such as the Central Bank of Kenya (CBK), to manage the economy.
Changes in interest rates affect how much we pay or earn on loans, savings, and investments. When interest rates rise, borrowing costs increase, making mortgages, personal loans, and business financing more expensive.
This tends to reduce consumer spending and business investment. On the other hand, lower interest rates reduce borrowing costs, encouraging people and businesses to take loans, thereby boosting spending and economic growth.
Higher interest rates also benefit savers, as banks offer better returns on savings accounts and fixed deposits, incentivising saving. In terms of investments, low interest rates often drive investors toward higher-risk, higher-return assets like stocks or real estate.
The Central Bank Rate (CBR) serves as the main monetary policy tool. A change in CBR can increase or decrease lending rates, making loans costlier or cheaper. The CBR thus plays a crucial role in savings and investment in the economy.
Inflation controls
Inflation, being the general rise in prices of goods over time, directly affects the purchasing power of individuals.
To control it, governments may adjust monetary policies, e.g., increasing interest rates or fiscal policies, eg, reducing public spending.
While these policies are designed to protect the economy, they come with effects that can be felt at the household level.
For consumers, inflation erodes real income.
Even when salaries remain the same, basic needs like food and transport become more expensive. For salaried workers, a pay raise may simply keep pace with inflation rather than increase actual wealth. For students or low-income earners, inflation can mean choosing between basic needs like meals or transport.
Businesses also face increased input costs, which may lead to downsizing. Ultimately, inflation reduces the value of money in individuals’ pockets. Inflation control policies, therefore, influence how individuals save, spend, and invest.
Wages
Government changes to wage policies, such as increasing the minimum wage, can have an impact on personal finances, especially for low-income earners.
On the positive side, higher wages boost take-home income, enabling individuals to save more and pay off debts. However, there are important trade-offs.
For businesses, higher wages increase operating costs, which leads to higher prices for goods and services. This can erode purchasing power due to inflation. In some cases, companies may respond by downsizing to control costs.
To manage these changes, individuals should review and adjust their budgets to reflect both increased income and potential cost-of-living changes. They should increase their savings rate to build a stronger financial cushion.
Overall, while wage increases can improve financial well-being, they require careful planning to fully benefit from the additional income.
By staying aware and adjusting spending, saving, and investment strategies accordingly, one can better navigate the economic shifts these policies bring.
