When it comes to saving, few instruments provide the kind of benefits that SACCOs do. SACCOs earn members' money in two distinct ways; You can earn interest on your deposits and dividends on your shares. Compare that to MMFs, bank accounts, or Chamas, and you'll understand why SACCOs are popular among Kenyans.
When you join a SACCO and purchase shares, you become a shareholder. SACCOs invest all the shareholders' money and divide returns among members depending on the number of shares they own. These returns, which are typically in the form of cash, are called dividends.
SACCOs usually pay dividends regularly at different intervals depending on what members agree on. The interval can range from monthly to annually. Additionally, shareholders usually hold annual general meetings to decide the dividend and interest rate to offer in the coming financial year. However, dividends can sometimes be higher or lower than the promised rates depending on how SACCO's investments perform.
SACCO dividends aren't a windfall. They can help you advance financially and build wealth when put to good use. This article will explore five ways you can smartly use your SACCO dividends.
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The only way to be self-sufficient and live a fulfilling life in your golden years is to save and invest in your prime working age. Saving for retirement can, however, be hard when you have a lot of responsibilities and other saving goals. Nonetheless, it's crucial that you prioritise your retirement planning.
Consider Jack's case. He's a 33-year-old self-employed father of two. Jack makes about Ksh80,000 per month but rarely saves for retirement despite saving 20% of his income monthly. He's in two SACCOs where he keeps his savings. In one, he's saving to buy a house; in another, he's saving his kids' education fund.
Jack has been accumulating shares and increasing his SACCO savings for the last five years. During the previous financial year, his SACCOs earned him combined dividends of Ksh78,000.
Recently, Jack learned about the importance of retirement planning and decided to open a retirement account. Since he couldn't save a portion of his income every month, he decided all the dividends he'll earn from his SACCO shares would go towards building his retirement fund. He can now save for retirement without affecting his other two long-term financial goals.
If you are Jack struggling to save for retirement, you can use the dividends you earn from your SACCO to kickstart your account. You can save the dividends in a fixed bank account, invest in treasury bonds and bills, or save it in a pension scheme like NSSF. You can also consult your SACCO and ask if they offer retirement savings accounts.
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Emergencies are inevitable, and you must be financially ready by building a safety net. Having a rainy day fund ensures that you stay prepared to deal with significant and unexpected bills like medical expenses, and you can provide for yourself and your dependents when you lose your income. But building an emergency fund can be tricky, especially if every shilling you earn has been budgeted for.
Consider the case of Dennis. A 35-year-old high school deputy principal. Last year, he had a significant financial emergency. His car was involved in an accident, and he had to spend slightly over 100k to repair it. Since he didn't have an emergency fund, he opted to take a loan from his SACCO instead of using his savings.
During the loan processing stage, his loan officer gave him nuggets of wisdom. He noticed that Dennis was receiving over Ksh60,000 in SACCO dividends every year. When asked what he uses the money for, Dennis said he takes his family on a short vacation. The loan officer advised him to find other ways to fund the vacation and use his dividends to build an emergency fund. That way, he wouldn’t have to worry about going into debt when hit by a considerable expense.
If you've tried building an emergency fund, you know it can be a slow process as it requires putting money aside gradually. But if you are in SACCO and earning dividends, you can quickly build up a sufficient rainy day fund to cover three to six months' worth of expenses. You can take more risks and stay financially stable with enough emergency savings.
If you are a parent, you understand the importance of having a regular source of income to keep your children at school. You can create one such avenue if you save money in a SACCO. You'll be able to use the dividends you earn from your SACCO to pay school fees for your kids.
You can also use SACCOs as a saving instrument for long-term goals like building a college fund for your children. Most SACCOs have saving and investment schemes that help members educate their children without straining. You can join such schemes and invest your dividends there. They will typically have higher interest rates than regular savings accounts and are easily accessible compared to other traditional SACCO deposits.
Investing your SACCO dividends to educate your kids will also prevent them from taking debt to afford higher education. This will give them a headstart in life as they will start their careers without debt.
To build wealth, you have to diversify and invest in instruments that make you money. You can direct your dividends to other investment vehicles if you want to diversify your portfolio by not putting all your eggs in one basket. This strategy lowers your risk exposure and creates new sources of income for you.
Some income-generating assets you can invest your dividends include:
Stocks and shares - You can invest in securities, stores, and shares listed on NSE to generate income. These instruments can also appreciate, and you can sell them at a profit later.
Fixed Deposits - These are saving accounts that offer higher interest rates.
Annuities - This is a contract between you and insurance companies that promises to pay you or your dependents and steady income in the future. You can invest in annuities by contributing monthly, annually, or lump sum. Examples include life insurance and pension schemes.
Start a business - You can use your dividends to start a business or grow your business to generate more income.
Unit Trust Funds - These types of investments pool funds from different investors and invest on their behalf. UTFs are regulated by the Capital Markets Authority (CMA) and include money market funds, equity funds, balanced funds, etc.
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Insurance is a lifesaver when it comes to solidifying your finances. It allows you to transfer risks preventing you from spending out of pocket, and can also be a saving vehicle. But the cost can add up when you have to pay for all the essential insurance coverage.
Depending on your insurance provider, missing payments can result in fines, and you can lose the right to claim it. Keeping up with insurance payments can be challenging, especially if you pay your premium monthly. To avoid policy lapse and ensure you consistently pay your premiums on time, you can direct all your SACCO dividends to pay for insurance.
The benefits of using SACCO dividends to pay for insurance include; It could be cheaper as you'll pay annually, and it reduces the risk of missing payments.
This process involves using the dividends you earn to buy more SACCO shares and, in turn, make more dividends. This strategy allows you to grow your money using the power of compound interest.
Consider the case of Wairimu, a 25-year-old using SACCO dividends to build her wealth and retirement nest egg. She invested Ksh100,000 in buying SACCO shares which process attractive returns of 14.4% per annum. In the first year, Wairimu earned Ksh14,400, which she reinvested in the SACCO. Wairimu plans to reinvest all her future earnings as well.
If she stays invested for the next 30 years and reinvests all her dividends, she'll have Ksh11,219,070 when she turns 55. Her initial investment could've earned her over Ksh11.1m.
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SACCOs can offer secured loans at three to five times your shares. When put to good use, debts can help you build wealth.
You can use this loan to start a business, invest in other income-generating assets, and use the profit to repay your loan.
Additionally, SACCOs also encourage members to invest in equity-building assets such as real estate. They can help members acquire prime lands at affordable prices. SACCOs also partner with housing cooperatives such as NACHO and other government agencies to secure members affordable mortgages.
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For years, SACCOs have been the go-to savings instruments for Kenyans. This is all thanks to the advantages they pose over other saving vehicles. If you are considering joining a SACCO, you need to understand its benefits and how they compare against popular saving instruments.
Before joining a SACCO, you should do extensive research. To start, you need to ensure that the SACCO you are joining is regulated and registered by SASRA. You should consider joining SACCOs with a good track record of paying members dividends on time. A good strategy could be to join SACCOs with close friends or family as members, as they can give you first-hand experience. And not to mention, they are more likely to guarantee you a loan.