I have a new favourite podcast: NPR’s Planet Money. Every single podcast gives me an idea for a post – although what I would write is basically a transcript.
For example, their latest episode is: “The Economist’s Guide To Drinking While Pregnant” – which is totally relevant for the sanctimoniously knocked-up. It does a little shredding of doctors, most of whom (if they’re honest) often practice in the dark, with only a vague reference to a number of studies that appeared in a recent medical journal. Unfortunately: said studies are often woefully short on good methodology, and rather heavy on the common sense. The rest is all gut-feeling, experience and bedside manner.
But that’s for a later time. What I really want to talk about is something that’s been close to my heart (?) for some time now: empowerment. And specifically: how that relates to financial freedom.
A Touch of Truism
Like any true Conservative, I don’t believe that liberation comes from without. Many assume that “not coming from without” must mean that “it can only come from having stuff handed to you so you’re no longer without”, but that would be unfortunate wordplay. Because what it should imply that liberation comes from within. Empowerment is a better lifestyle choice, not the gift of better lifestyle*.
*I feel like a campaign manager – what with all the pith.
When it comes to the money part of said lifestyle, financial freedom is a form of fitness like any other. It requires discipline and restraint. It also takes time: you don’t do a press-up today, and look like an underwear model tomorrow – #chagrin. Some people do it chemically and steroid up, but there’s only so much leverage you can inject before there’s a heart attack. There’s really no substitute for a healthy diet and a regular exercise.
Taking The Fitness Allegory A Step Further
In my personal struggle to be mankini-ready for summer, I have realised the following:
- If I try to go running on my own, I struggle to do it every day.
- Running isn’t really that useful an exercise for looking good (just check out this Oatmeal cartoon The Terrible And Wonderful Reasons Why I Run Long Distance – it’s ALL TRUE).
- If, however, I’m part of a fitness class where I have friends that (a) expect my attendance, and (b) I actually enjoy seeing, then I’m suddenly there three to four times a week.
- That is: the social element allows me to do more while trying less #MorePith
- Also, the experience of being fitter makes you want more, so you eventually step up a grade and start doing extra weight-training sessions on the side with an investment-banker-turned-sports-scientist-friend who’ll bring all the equipment to your house in a van and teach you to grow shoulders from the privacy of your own garage (#TipsHatAtRob and refers everyone to The Strength Lab’s facebook page).
Having recently listened to Episode 466 DIY Finance, I don’t think that the process of becoming financially fit should be any different. Certainly not for me – because I’m a social and competitive person, and without that sense of social obligation, I’m far more likely to go for coffee and cake instead of exercising. Or spend the winter hibernating in my electric blanket.
So Let’s Start A Susu
I realise that sounds like a song by the Scissor Sisters, but a susu is a type of social savings scheme favoured by Americans of Caribbean descent. Similar savings schemes exist in other parts of the world:
- In South Africa, it’s a stokvel
- Korea has the gye
- Bolivia, the pasanaku
- The gamaivah of Egypt
- Arisans in Indonesia
- Also: hui (Vietnam), chikola (Kenya), tontine (Mali), ko (Japan) and tanda (Mexico)*.
*I’m grateful to this article from the Wits Business School for these names.
A common form of these savings schemes works as follows:
- A group of savers gets together and forms a club.
- They agree to contribute a set amount of money into a central pot of money each month.
- They all draw lots.
- Each person, according to their lot in the queue, walks away with the full pot of money each month.
So let me be the first to confess it. When I used to read about this kind of scheme, the thought that went through my head: “Yes – but that’s only for poor people. And they’re losing out on interest because they’re uneducated and lack access to banks. Shame.”
Yes. Intellectually arrogant and classist – it’s not attractive.
But I have since done the math, and that opinion was quite wrong. Here’s why:
- Let’s say that there are 18 people contributing $100 into the pot each month (like in the Planet Money podcast)
- If I’m the first person to receive the pot, I get $1,700 immediately, and then pay $100 into the pot for the next 18 months. It’s the small-scale equivalent of getting a mortgage with no interest repayment. So it’s definitely better than going into debt, especially if I spend the money on something like a dishwasher (which I would otherwise have bought on hire-purchase).
- In fact, this principle applies for half the recipients. Specifically, the first half.
- So the only real losers are the second half of the members – who lose out on the interest that they would have earned on their savings if they had done it themselves.
So we’re halfway there on the social savings scheme being better than doing it yourself.
But here’s the next important truth: saving money yourself, in small drips, will likely earn you no interest. Most banks will only start offering interest once your bank account exceeds a certain threshold; and even then, much of it will be eaten by bank charges.
At a micro-level, what you lose in interest is what you save in bank charges; meaning that the group as a whole has a net benefit over the members doing it individually. And provided that the rotation of getting the money changes fairly, you’ll end up better off over time.
But The Interest Aside
In this situation, I think that interest is the least important component. Because:
- Would you save as much if you did it on your own?
- Would you leave that money completely untouched in the interim?
The answer to that, for most of us, is “No” to both.
An example: let’s say that you lose your job. If you’re part of a savings scheme, you’re probably going to make a plan to get the money together for the savings contribution. After all – if the penalty of missing a payment is that you lose out on your turn in the pot (either this round or the next) and that you’ll let your friends down, you have a strong incentive to make it happen. But if you’re doing it on your own, and you’re just making regular deposits into a savings account – then you’re going to withdraw the money – not continue making deposits!
And similarly, savings accounts are a general temptation to go on holiday or buy new clothes. If you’re in a savings scheme, you can’t touch those savings until it’s your turn…
So if you really want to start the process toward becoming financially free, join
the a club.
I’m just saying.
Also: who’s in?