Old Mutual has released their 2016 “Savings and Investments Monitor” report for South Africa. You can find it here, but this is the graph that I found the most interesting:
Look at how many people use “informal savings”. We’re talking stokvels here. Or susus, or savings clubs, or whatever you’d like to call them. And in SA, they’re more prevalent than cash savings, or pension plans, or life insurance. Almost four in five people are part of one.
So I’ve written about them before, but let me repeat some of those thoughts here.
Susus and Stokvels
The 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.
Confession: when I used to read about this type of thing, the first thought that would go 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 some math, and realised that my first thought was quite wrong. Here’s why:
- Let’s say that there are 18 people contributing $100 into the pot each month
- 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 everyone that receives their payout early on in the round.
- So the only real losers are the members who get their money out toward the end – and lose out on the interest that they would have earned on their savings if they had done it themselves.
So for at least half of the members, the social savings scheme is better than doing it yourself.
And what about the other half? Well, here’s another harsh reality: 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 then, what you lose in interest is offset by 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.
The Interest Aside
In this situation, I actually think that interest is the least important component. Because two questions:
- 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. But if you’re in a savings scheme, you’re a lot more likely to follow through.
An example: let’s say that you lose your job. If you’re part of a stokvel, you’re 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 get your saving on, it’s always best to do it with friends.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.