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Money Management
December 20, 2024
Financial freedom is an aspiration that many have. Financial advisers speak of it as something that is within reach for those willing to put in the necessary steps to attain it. Some of these steps include saving and investing.
However, to see the results of your savings and investments, you have to be consistent. The time taken to hit your goals may vary, but five years is a long enough time to see the results of your savings and investments.
This article will paint a picture of what it would look like if you saved and invested for five consecutive years. In the article, we shall make several assumptions for the sake of projections.
Assumptions
Additionally, we shall use two relatively low-risk investment vehicles. Ideally, the risk exposure of these investment instruments is tolerable to most people willing to invest. For more returns, you can choose investment platforms, if you have the risk tolerance.
The two investments we will use in our calculations are Saccos and Money Market Funds (MMFs). These two instruments cater to different needs while investing.
In a Sacco, you get to grow your capital, earn dividends as well as interest on deposits, and get access to more friendly credit facilities. On the other hand, an MMF is more liquid than a Sacco; hence, it can be used as an emergency fund.
In our example, we shall divide the Ksh15,000 equally among the two investments, Ksh7,500 each.
But before we delve into the numbers, let’s answer a pertinent question.
Ksh 15,000 is an arbitrary number chosen for this example. You can plug in a number you are comfortable saving every month, over the next five years.
There is no limit on how much of your salary, but it is advisable to always save at least 20% of your income. If we go by this principle, then anyone earning at least Ksh75,000 as the net salary (about Ksh102,000 in gross monthly pay) should be able to comfortably save Ksh15,000.
However, even if you are making less than Ksh75,000, you can be frugal and bootstrap to save more. For example, the frugal minimalist savings rule requires one to save at least half their net pay - which in this case would be Ksh15,000 for someone earning at least Ksh30,000 in net monthly salary.
When investing in a Sacco, your money earns interest in two ways, from dividends and interest on non-withdrawable deposits. In this example, all deposits will be non-withdrawable.
One of the reasons why Saccos are able to give consistent returns is that they are member-owned. The moment you start investing in a Sacco, you become a shareholder; hence, every Sacco member is entitled to the profits a Sacco makes, hence, these profits are distributed in terms of dividends and earnings on deposits.
In the first year, you will start to earn interest on your deposit the very first month you deposit. You will earn from the first month since Saccos calculates interest on deposits monthly. Therefore, the 12% per annum will be divided by 12 months, so that your money earns 1% per annum. This method allows the Sacco members to take advantage of the compounding power.
Assuming you invest in the Sacco shares consistently over the next five years your total investment will be worth Ksh622,138.
A money market fund is a fund that pools investor money together and invests it in high-liquidity, low-risk investments such as government bonds and bills, corporate bonds, or bank deposits.
MMFs also pay their interest, like Saccos, every month. If an MMF is paying 12% interest per year (which is what we are assuming here), then the monthly interest payment will be 1% per month. Calculating interest per month is favourable for investors who want to start investing or withdraw their investment at any time, plus it helps investors benefit from compound interest.
If you keep investing Ksh7,500 for five years in an MMF that earns you 12% in annual interest, you will have Ksh632,272 at the end of five years. The interest earned on MMF accrues daily and is added to your principal at the end of every month. .
Investing Ksh15,000 per month for five years is a significant commitment. In the end, you will have invested Ksh900,000. From the Ksh0.9 million, you will have Ksh622,138 from the Sacco and Ksh632,272 from the MMF. In the end, your total amount of savings will be Ksh1,254,410.
This amount will be impacted by the taxes you will have to pay. On the Sacco dividends, you will pay a 5% withholding tax annually, while on the MMF, you pay 15% on the interest. There are also transaction fees and processing fees, which vary across individual Saccos and fund managers (for MMFs).
This article's purpose was to paint a picture of how consistent investing, even in low-risk investments for a long time, can impact your financial goals.
The numbers used in this article are based on approximations based on returns announced by Saccos and fund managers. The exact returns may vary depending on the specific Sacco or fund manager you invest in. The interest earned may also be subject to deductions such as income tax, and administration fees, among others.
It is proper to understand that there is more nuance when investing and many other factors should be considered other than returns. This may include the reputation of the Sacco or fund manager, the ease of accessing or depositing your funds, customer service, ability to get credit facilities, among others.
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