Should I invest my Sh1m in a Sacco, stock my business or to take a loan against it?

My name is Alfred. I am a businessman earning about Sh150,000 after expenses. I have savings of Sh1 million in a bank.

I am wondering if I should withdraw these savings and put them in a Sacco account instead to start earning dividends, if I should use them directly to expand my business, or if I should take a loan against them.

I am also wondering which is the best way to invest this money and what are the possible returns I should expect. Please advise me.

Robert Ochieng’, the founder and investment advisor at Abojani Investments

You are encouraged to have adequate emergency funds in an easily accessible account. Unforeseen circumstances happen in both personal and business situations. Is your business cushioned enough to withstand an emergency? Being able to reach out to a decent sum gives you assurance and guarantees a good night's sleep.

Your business returns decent net earnings. Using the 50:30:20 budgeting method, where 50 per cent of earnings go to needs, 30 per cent goes to wants and debt repayment, and 20 per cent to savings and investments, you should be able to build passive income assets with Sh30,000 monthly. You could put this amount in a money market fund for emergency savings or short and medium-term goals.

It is recommended to save three to six months of expenses in such a fund. In your case, you'd need Sh360,000 to Sh720,000 to meet three to six months of living costs in case of severe business losses. Saving Sh30,000 monthly for one to two years will guarantee this. These savings will earn interest. Assuming a net return rate of 11 per cent per annum, you would have over Sh800,000 in two years.

A decision to expand your business depends on research on existing market gaps. You could scale up your business to increase net income over Sh200,000 monthly. Identify opportunities for this and do a cost-benefit analysis.

It is critical to know where your business stands in terms of cash flow, sustainability, revenue generation and net profitability to determine if an additional capital injection is required or not, and whether this is a serious business that has broken even or whether it is a more of a hobby that is taking more than it is generating. If satisfied, you could use the Sh1 million savings.

If the Sh1 million were in a Sacco Bosa account, you would get a 4X loan multiplier, granting you Sh4 million to boost your business. This would need a loan repayment ability of about Sh108,000 for 48 months.

Diversification of income sources entails cutting off reliance on a single income source. Your passive income also complements active income. Should you opt to invest the Sh1 million in the capital markets, there are a number of options.

a) Treasury bonds: These are government debt instruments where you lend the government for a fixed tenor, say 10 years. Interests are paid semiannually. You will receive Sh80,000 every six months, assuming a 16 per cent annual interest. You get back your invested capital at the end of the tenor.

b) Sacco deposits and share capital: Sh1 million will give different returns depending on allocation to either scheme. If you put Sh800,000 in the deposits scheme, you will earn Sh96,000 (at 12 per cent interest rate). Sh200,000 in the share capital scheme will give Sh30,000 (at 15 per cent dividend rate).

c) Dividend stocks: Investing Sh250,000 in each of BAT, NCBA, Standard Chartered, and Williamson Tea at current prices will earn you gross dividends of Sh127,000 as per 2023 declared dividends. This is besides great capital gains potential.

Alfred, an investment choice depends on your risk appetite and understanding how you gain or lose money. Invest in what you understand best.