The Saving Collective

Recently, I read a wonderful article in The Atlantic entitled How the Other Half Saves: Financial Planning on $2 a Day. The article focused on the financial planning practices of individuals in other nations who earn very little – in some cases, as little as $2 a day.

One might think that the life stories of these individuals would be so different than ours that there is little we can learn from them. In truth, there are a lot of valuable financial tactics tied up in the article.

The tactic that really had an impact on me was the idea of collective saving for a shared goal.

Thembi, a 50-year old South African who also participated in the Portfolios project, was living off $169 a month when her brother died of tuberculosis. Funerals typically cost more than half a year’s salary in South Africa at this wage level, the authors write, and Thembi was responsible for all the entire $1,414 ceremony. Here’s how she did it: Thembi held memberships with an informal burial society, a type of insurance for funeral expenses, but it didn’t cover the whole cost.

A burial society is an interesting phenomenon that apparently was once quite popular in all societies, but has become much less popular in the West. Essentially, a burial society is a group of people who collectively agree to help each other out with the costs and expenses of burials. Usually, the society owns a plot of land in which the members are buried and the society is also responsible for the upkeep of the land.

Members of the society tend to work in shifts at the funerals of other society members. In other words, if you are a member of such a society and you’re called on to work at a funeral (doing things like digging a grave and so on), you step up.

There are also membership dues in such a society to cover expenses such as caskets and headstones. These dues are typically very low.

The specifics of a burial society might be difficult to pull off in the modern world, but that’s just one example of a broader idea.

She also belonged to a saving club, but didn’t have enough savings to cover the remaining expenses. Thembi patched together additional informal loans from relatives and grants, but still fell $92 short. She could have sought a formal loan from a bank, but her lack of steady income and the small amount needed made her an unattractive loan candidate. Thembi decided to avoid the costly expense and added stress of visiting the bank where she would most likely be rejected anyway, and took out an interest-bearing loan from her savings club.

A savings club is much like a burial society except that it exists to hold the money of all of the members who contribute to it.

Most of the time, a savings club is something like a collective emergency fund. Each member is expected to contribute some amount to the club each month and that money is held as a balance for the club. When someone has an emergency, the club meets and decides collectively how much help the club can offer to that person.

Because of the collective nature of it, the club can often invest the collected funds in ways that wouldn’t work with an ordinary emergency fund. They can gain access to high-balance accounts with a high interest rate, earning a better return for everyone involved.

Often, a savings club becomes something of a social construct as well, with the members realizing that they’re all in this together and offering each other non-financial help of various kinds. For example, a member might find that they’re suddenly out of work, but another member might have work for that person. One member might have a washing machine breakdown, but another member knows how to repair them.

The key idea behind the article is simple: in impoverished situations, people survive by working collectively. They don’t “go it alone.” Everyone doesn’t have their own emergency fund; instead, they have a community emergency fund. Everyone doesn’t rely only on their own skill set; instead, they share the skills.

Now, let’s translate that savings club idea into a situation that anyone might face. Let’s say I gathered up several of my friends and we started a savings club together (say, eight members total). Everyone contributes $20 a month to the club. Whenever you have an emergency or need some help with financial questions, you openly ask the group for help and reasonable help is provided. If it requires that money be taken from the group, a proposal is made and a vote is taken on it.

For that $20 a month, a total of $160 is going into the group’s coffers. That means if you’re in such a group for three months and your washing machine breaks down, there’s probably enough available to help you replace it. In other words, the club represents a much larger emergency fund than you would be able to achieve on your own in a short time.

Some people might see this as a potential route for scamming, but the social pressure of having a lot of people involved that you know and have relationships with would keep you from scamming, and adding members could easily be done on a trust-based system.

Perhaps more valuable, though, would be the advice. This would be a perfect forum for buying suggestions, financial pointers, sharing of deals, and other such things. Even if you were uncomfortable with the dues, such a club could have value simply as an advice-sharing mechanism.

If this seems intriguing to you, start your own group. Facebook makes starting such a group incredibly easy, and you can make it private for just the group members. If you’d like to extend it into a savings club, that seems like a strong idea as well.

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