The famous personal finance book Rich Dad Poor Dad says that to be rich, you have to get to a place where your money makes money. You can make money while you are asleep. If you are a Sacco member and have been saving with the Sacco, you are on the right track to making your money work for you.
This is because, at the end of the year, which we are in, most Saccos hold their Annual General Meetings (AGM) and communicate how much dividends the members will get and the interest on deposit for the following year.
How much, then, do you stand to earn this year from the savings you have been making? In this article, we will explain how to calculate your earnings from your Sacco.
Briefly, Sacco is a savings and credit organization. Saccos are formed when members come together and save in one basket. Then, from the basket, members can borrow loans, which they then pay back with interest. The interest paid back is earnings for the Sacco and is usually divided among the Sacco members.
Secondly, with a growing savings basket, Saccos can also invest in other income-generating assets. The profit from these investments is also brought into the basket and divided up among the Sacco members.
Nonetheless, before the accumulated earnings in the basket from interest on loans and assets earnings are divided, Sacco's operational costs must be settled, and some money re-invested for Sacco's growth. What remains is what is divided up as dividends to the Sacco members.
A dividend is like a share of profit that you get from your Sacco as a member. The better dividends a Sacco pays, the more people it attracts, and the more it grows.
On the other hand, before dividends are paid, the money you invest with the Sacco also earns you interest. The interest you earn from your deposits is at a rate predetermined in the previous AGM.
At the general meeting, Sacco’s announce the interest rate for the coming year. That interest rate is paid monthly, which means that your Sacco deposits make you money every month. This is where you start making money in your sleep.
However, how much do you make?
Interest on deposit is computed on a pro-rata (proportionally, per the rate) and compound basis at a rate to be recommended by the management committee and approved by the Annual General Meeting (AGM).
So, if you want to calculate how much you will earn this year from the interest your deposits earned, you will need to find the agreed interest and divide that interest by 12 (number of months in a year).
Your interest is calculated depending on the closing deposit every month.
If you joined the Sacco this year, your earnings will start in the month that you signed up. Some Saccos upload a template on the website to assist members wishing to confirm/ compute their interest on deposits.
To get the dividends for each month, multiply the closing balance at the end of each month by the monthly rate.
For simplicity purposes, assume that you have a monthly Ksh5,000 contribution to the Sacco in your budget. You started saving last year, so at the beginning of the year, you had Ksh20,000 in your Sacco account.
At the beginning of the year, you have Ksh20,000 in your Sacco deposit account, but in January, you deposit Ksh5,000. So, at the end of January, you have Ksh25,000 as your closing balance.
The AGM agreed that Sacco would give a 12% interest on the deposit annually. We divide the 12% annual interest rate by 12 to get a 1% interest rate per month.
Therefore, your January earnings from your deposit will be one percent of Ksh25,000, which is Ksh250.
If you add Ksh5,000 in February contributions, at the end of February, you will calculate your earnings with a closing balance of Ksh30,000.
Here is how that will look for the entire year on a table.
NB: Take note of the monthly closing date for your specific Sacco to determine your closing balance.
Advantages of the Pro-rata Method
Fairness: The pro-rata method rewards members who save early into the year and ensures they get the highest yields from their investments. The compounding nature of the pro-rata method ensures that those who are consistent in depositing get to earn more from their money than those who deposit large sums yearly or twice a year.
Ability to factor in withdrawals. For instance, during the period. Members’ shares may be redeemed to cover late payments for the loans. In such a case, the pro-rate basis method for dividends calculations ensures that the same is reflected in dividends.
Dividends on share capital are computed based on the closing balance at the end of the financial year at a rate recommended by the management committee and approved by the Annual General Meeting.
The dividend rate is determined depending on the performance of the Sacco. Determine the average amount in your savings or share account during the specified period. Multiply your savings by the dividend rate to calculate your potential dividend earnings.
Using the above example, the closing balance at the end of the year is Ksh80,000. Applying a dividend rate of 10%, then Ksh80,000 would earn Ksh8,000.
Considering the example we have been using, you would earn a total of Ksh14,300 from your Sacco savings. This is the interest on savings plus the dividends.
However, there are other costs you need to factor in.
You have to pay a withholding tax and an excise duty tax on the dividends you have earned. According to Kenya's Income Tax Act 2021, the withholding and excise duty tax rates are 5% each. This means that you will pay a withholding tax of Ksh715 and an additional Ksh715 on excise duty.
You also have to take into consideration the processing, which varies from Sacco to Sacco.
Saving in a Sacco is a sound financial decision. If you have been able to save throughout the year, it is about time you reap the rewards of your input. Using the information and examples above, you can be able to estimate how much you stand to earn from your savings this year.