I have been saving in my sacco for years and will be getting dividends of about Sh500,000. How best should I invest this money?
First of all, congratulations, a dividend of that amount means that you have built yourself quite the nest egg in your sacco arrangement.
Naturally, the question that would follow this would be, to what extent is your sacco account the only mode of savings or investment?
I use the word investment quite sparingly because, despite its return based on how much other sacco members have borrowed, or the various strategic investments the sacco management has made, saccos are primarily used to ensure one has access to loans when they need them.
There are of course many different ways to save and, in this country, especially, saccos are at the forefront of these savings and investment vehicles. So, how should you invest the Sh500,000 you ask?
First, we must ensure that we are well prepared and structured to make the right decisions once the money hits our account. The best way to do that is by having a financial plan.
Here, focus on the basics of how you can structure your financial plan to enable you to cover your bases with the aim of setting yourself up for a brighter future while mitigating any risk that may force you to raid your vaults.
A model that I have used that works is ensuring that you have a long, medium, and short-term financial plan. As you structure your plan in this manner, ensure that you have adequate insurance to assist in mitigating as much as possible, the risk that you will have to take from your hard-earned savings and investments to take care of said risks.
Some of these risks include medical expenses, expenses incurred due to road accidents, and domestic insurance packages that shield me from various risks in the household including loss of mobile phones and the like.
Short-term financial plan
This plan should typically cover the next 1-3 years of your life depending on where you are in your financial journey.
It is important to have a tailored plan with a qualified financial adviser to straighten the various kinks that may be specific to you. Here it is key to ensure that any investments are liquid or close to liquid to help you take care of your immediate needs.
Examples of vehicles that you can utilise here are Money market accounts, high-yield savings accounts, short-term government bonds, and treasury bills among others.
Money market accounts, for example, ensure liquidity by investing in liquid assets and can typically get the amount you require to your account within five days.
Saccos that provide dividends annually also fall into this category as there are typically no restrictions on withdrawing your funds as long as you do not have any outstanding loans.
Be sure to put a portion of your funds into this cohort. How much you put away depends on your liquidity needs. Should they not be substantial, then you can decide to focus more on your medium-term and long-term goals.
Medium-term financial plan
Now that you have taken care of or enhanced your short-term goals, it is time to look at those goals where you may not necessarily need to cash out from soon.
The exact period of time that is considered medium-term depends on the investor's personal preferences, as well as on the asset class under consideration. In this cohort, your horizon (time to maturity of investment) is typically 3-10 yrs.
Here, the examples of investments you are looking at making/enhancing are; bond funds, longer-dated government paper with the same horizon as your goals and fixed deposits among others.
A personalised plan with a financial adviser should help you choose what is appropriate.
Examples of medium goals you can align your investments to are; completing an additional educational milestone, such as earning a Bachelor's or Master's degree, and having a funded school fees account for your children and car funds among others.
This should take a good chunk of the dividends pay-out to enable you to have peace of mind as you structure your long-term financial goals.
Long-term financial plan
Here one would be typically looking at the returns they want to get in 10+ years. The major pro of this cohort is that it allows one to venture into riskier asset classes. Equities or shares come to mind due to their volatile nature in the short term.
One will need a CDS account in order to have access to this asset class and a good broker is also recommended to assist you in navigating this sometimes complex world of equities.
Your retirement plan also falls in this cohort and it may be time for an injection of an additional voluntary contribution into your pension fund.
Insurance also becomes key in ensuring you protect yourself or your business from one-off shocks that have levelled savings in one fell swoop.
The examples of these disasters are all around us and are clear for everyone to see.
All in all, should you not need to spend the dividend, please apportion it into the three cohorts I have mentioned above and be sure to leave an amount to take care of your premiums and ensure you protect the wealth you so desperately seek to build.
Mr Otenyo is a consultant on retirement solutions. | [email protected]