Updated on 10.29.14

Saving Psychology from The Economist

Trent Hamm

Working Women of Moulovi Bazar, Sylhet - Bangladesh.  Photo by Ariful H. Bhuiyan.Recently, while digging through the magazines in our magazine rack, I came across the May 16, 2009 issue of The Economist. The Economist is my primary print source for news and it almost always gives me quite a bit of food for thought.

Anyway, on page 82, I found a really interesting article entitled “Smooth Operators,” which discusses some very savvy saving techniques that have developed in nations with developing economies. First, though, is a bit on why such techniques are needed there:

Paying interest on your savings will strike most people as odd. Yet some poor people in the developing world do just that. In West Africa, for example, some people pay roving susu collectors a fee amounting to a -40% annual interest rate for looking after their deposits. […] a similar phenomenon in India, where a female deposit collector named Jyothi looks after small savings for people in the slums of Vijayawada at an effective yearly interest rate of -30%.

To us, this seems very alien. Why would you bother to put money in a savings vehicle if you’re charged such outrageous fees?

To put it simply, money security is the real reason. Keeping significant amounts of cash on hand can be dangerous, and after doing a risk assessment, it’s pretty clear that to many of these people, it’s better to pay that painful fee than risk the high likelihood of having the money taken in some method – a -100% interest rate is far worse than a -40% interest rate.

But why save at all?

Many of the subjects emphasized [that] controlling the flow of cash becomes all the more critical when income is not just low, but also unpredictable and irregular.

In other words, many of the people using these savings systems have very irregular incomes, so in order to survive during the many lean times, they need to sock money away. And without personal security, they need a service that keeps the money safe, so they utilize the susu (and other local variants).

It’s not that different than the problems that people face in America, where many people have irregular incomes (I myself am one of them). To put it simply, if your income is irregular, you have to save. You can’t spend what you earn, or else you’ll be in deep trouble during the lean times.

What gets interesting, though, is some of the tactics the savers use.

They are acutely aware, for example, of the importance of some psychological phenomena whose effects behavioural economists have only recently begun to explore. For instance, they purposefully seek out commitments to help ensure that they meet their savings goals. Many of the South African women in the study joined several monthly “savings clubs” in spite of having bank accounts. They found that the extra discipline the clubs provided was valuable in itself, because it compelled them to save no matter what.

This is a really important point, one I think is overlooked in western society. Peer pressure is a huge motivator, and using it for savings goals pushes you strongly towards saving. The idea of a “savings club” seems a bit strange, but why not? Investing clubs are quite prevalent in the United States, and they have roughly the same goal – encouraging people to invest and keeping their eyes on the prize.

If you have some friends that are also trying to save for different goals, why not start a savings club? Meet once a month or so to talk about money saving tactics and to share your progress. Knowing that you have to tell the others in the club about your progress will push you to meet the goals you’ve set, lest you look bad in their eyes.

Another solid tactic comes later in the article:

The mother of a Bangladeshi man who found himself unable to stick to his monthly saving goal found she could make him save more by taking out a loan from a microfinance company. The shared obligation of having to pay the regular loan installments meant he abandoned his spendthrift ways.

At first, this might not seem like the best idea. Taking on debt to force yourself into regular savings behaviors?

But think of it from their perspective. That microloan might have a 10% interest rate. On the other hand, the susu down the street charges you 40% interest on your savings. Seems like a good deal to me.

This is not altogether different than when people play games with low-interest credit cards with 0% rates on balance transfers. They write a cash advance check from card A into their savings account, then do a 0% balance transfer from card B to card A to cover that check. Then they hold the cash in their savings, earning 2-3%, until they have to pay back the 0% transfer. Along the way, they can usually earn a few bucks, particularly if the amount isn’t large enough to really harm their credit.

In both cases, it’s a crafty way to use the financial tools available to you in an unexpected way to put yourself in a better financial place. Don’t just think of a credit card as a way to buy more stuff. Don’t think of a low interest or a zero interest loan as bad simply because it’s debt. Instead, look at all the tools available to you – and use them together to maximize your situation.

Personal finance lessons can come from anywhere. Always keep your eyes open.

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  1. To me it seems very strange to have negative interest. It’s like commissions on ATMs: I pay for having back my money; this is not business, it’s a ransom request…

  2. Kat says:

    And what are the guarantees that the “bank” won’t get robbed? We are so lucky here in the West, to have so many choices…

  3. Marc says:

    Nothing done voluntarily is truly “ransom”.

    Good article, really puts safety in perspective. I don’t think our society could function the way it does now if our choices were returns of -30% or -100%.

    -30% is a logical decision if robbery is common and police is ineffective or downright corrupt.
    It’s easy to forget how fortunate we are, we don’t have to make these kinds of choices.

    The Economist is a great news source, right-leaning, but rather centrist by American standards.

  4. Debbie M says:

    Actually, those microloans tend to have shockingly high interest rates, too, so the deal may not be as good as it sounds after all.

  5. LC says:

    You have not had much experience with the largest American banks like Citi and BofA if you think that paying a bank for the use of your money is strange. Interest rates – if any – below 1% and fees of $30 or more for checking and ATM overdrafts leave most Americans probably worse of than those in the third world. At least those banks are honest and upfront about their fees.

    It is automatic for Americans to look down upon places like Africa. But really Americans are busy buying the hype about America, and not bothering to wonder why people in such places are very happy and stress-free. There are trade-offs everywhere you go. There is a high price to pay for living in America.

  6. El Cheapo says:

    I think an analogous example in the US is taking a 457 or 401K loan as forced savings. Obviously the risks are job loss and missing out on investment appreciation. The plan sponsor makes an origination fee plus about a 1% spread over the prime lending rate. You get to save a large lump sum initially and pay it back over many months at 5-6% APR payable to yourself. Plus, its automatically withheld from your paycheck taking the math (and temptation to spend) out of the equation.

  7. K says:

    “Then they hold the cash in their savings, earning 2-3%, until they have to pay back the 0% transfer.”

    2 to 3 percent interest? Where?

  8. Kathy says:

    @Giorgio Sironi

    You are not paying to get your money back. You are paying for the convenience of getting your money back from the ATM. If you don’t want to pay the fee, then go to the friendly teller at the bank and get it there.

  9. tentaculistic says:

    I really love the idea of micro-lending. It’s amazing what a frugal person with an idea can do with a small amount of money. I love that it can transform lives.

    I never really understood why banks pay us to keep our money there until I took an economics class and learned that we have vast stores of pretend money zipping around our system. That was a shock to my mental system! I guess ever since then I’ve subconsciously been waiting for the bottom to fall out of the system. But I guess when you think about it, as other people said, they are charging you through account fees for the privelege of taking most of your money and loaning it out at high interest rates. Still better than under your mattress :)

  10. Tony says:

    As far as the real point of the post…. Find a good friend who is trying to save and/or pay down debt too, then start emailing progress updates back and forth. Most people would not want to hear detailed savings goals and progress, but when two people know they are motivating each other, it works wonders. Even just the simple act of sharing your own progress helps solidify your goals and motivation. With my buddy’s simple help, I have managed to increase my monthly savings from a few hundred dollars to $1700 per month.

  11. Bill in Houston says:

    I’d think you would get a better return stuffing it into your mattress than pay someone to keep track of your money. Almost sounds like a shakedown.

    Yes, Miss N’Beke, I will ensure that nothing happens to your money, for 30% of it…

    I know that third world countries don’t have insured bank policies, but this just seems like such a waste of capital.

    I don’t see how microloans tie in? Do these susu people make microloans, or is this just something else that they do in the third world? I’m reminded tangentially of the Jim Carrey movie, “Yes Man” where he starts loaning to everyone and many of the microloans pay off well… but that’s a tangent.

  12. sbt says:

    For those having trouble seeing how borrowing money with a microloan could improve people’s situation over saving money by giving it to a susu, think about this example.

    Imagine a poor woman in Africa who wants to buy a cow. She can improve her family’s health and nutrition, and she can sell milk, too. Let’s say a cow costs $100. Before the microloan program, it was very difficult to achieve that goal. She would have to save nearly $200 before she could buy the cow. She has very little income, and something always comes up. Now,imagine that same woman gets a microloan. She has a cow, which is a source of cash from which to make payments. The interest rate may be high, but it’s a possible interest rate.

    This is exactly why Mohammed Yundus won the Nobel prize in 2006. His program of microloans to poor people the banks turned away has changed so many lives.

  13. Steve says:

    We pay to keep our money secure in the US as well, in the form of taxes. Taxes pay for things like (non corrupt) police, laws, judges, court systems, etc. Maybe we don’t pay 30% for just those services, but we probably get a “discount” because the economies of scale.

  14. Bill in Houston says:

    SBT, I was talking about the article, not the concept of microloans. I’m quite familiar with the concept. Maybe it was the author’s writing style, which was a bit muddled to this writer.

  15. Amy says:

    I used to work nights with a group of young professionals. We had savings contests and tracked our spending in spreadsheets. Since we were each in different financial situations, any improvement month over month was a win–one person might have paid down credit card debt, another opened a savings account and contributed, someone else finally signed up for their 401k and got the company match. It was a good way to kill long hours at work and had positive results! Five years later I still hear comments from some of my coworkers that they still think of our contests when they save and I think it had a lasting impact on habits.

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