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Should You Use Group Savings to Meet Your Financial Goals? What You Need to Know

By Chika

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Last Updated: March 23, 2022

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Setting aside money periodically takes a lot of discipline. Most people do not achieve their savings goals because there is no support group that can nudge them in the right direction when they are derailing. 

Many Americans struggle to save money, yet saving is important for major purchases, dealing with emergencies, and having a secure retirement.

The LA Times states that the average American saves less than 5% of their disposable income. CNBC reports that 20% of Americans don’t save any of their annual income at all and even those who do save aren’t putting away a lot.

This problem is often structural. If you barely have enough money for everyday expenses, then it may be impossible to put some aside. The difficulty of sticking to a strict savings regime is also psychological in our consumer-driven economy with relatively easy access to credit. 

If you are one of those who struggle to keep to your savings target, perhaps you can consider co-savings as a viable alternative. Group savings may offer people an environment with mutual support and accountability to help with meeting difficult financial goals.

However, there may be harmful consequences if members of a group-savings unit do not honor their commitments.

Joining a savings group or circle where participants pool their money together and take turns in paying themselves can reduce the chances of defaulting on your savings goals because each member is accountable to one another.

It is also a low-cost, zero interest way of obtaining a loan on savings by creating accountability. Let's find out what group earnings are and how you can use them to achieve your financial goals. 

How Do You Develop a Financial Plan Step by Step? 

 

What is Group Savings?

Group savings is a rotating savings and credit scheme usually formed by a group of people who know one another, for the purpose of helping each other save money for a larger goal, such as an interest-free loan or major purchase.

The members of the group get together regularly to contribute an agreed-upon amount of money to a pool that is then given to one of the members.

Let’s say 12 people get together and each contributes $500 every month for a year. This contribution is paid to members each month in turns. This contribution goes around till each member has collected their sum ($6000).

The group could also keep all contributions till the end of the 12 months and distribute them to each member.

This practice, though new in western societies, has been practiced for centuries by people in underdeveloped regions without access to formal banking services.

The practice has been observed in Mexico, the Caribbean, India, and Africa and has been known by various names. It is called (e)susu among West African and the Caribbean ethnic groups, while the Mexicans refer to it as tanda.

In South Korea, it is known as  tanomoshiko, while the native Scottish call it menage

Group savings provided farmers, market women, traders, artisans, and classes of people without access to traditional banking services with a veritable means of raising capital for a large financial project like building a house, paying debt, purchasing crops, etc.

Each member is given a slot, which represents one periodic money withdrawal. Members are paid in turns whose order is determined by a drawing of slots or mutual consent agreed upon before the start of periodic fund accumulation.

Members can also swap their slot with another through mutual agreement provided it does not affect the payment cycle. 

 

5 Benefits of Group Savings

Several benefits come with co-saving in a group. These are: 

  • Additional support and accountability in your saving efforts
  • Building relationships with the appropriate amount of mutual trust for financial collaboration
  • You can candidly set savings expectations and meet them
  • Access to loans at low costs and zero interest rates since the amount you get is what you contribute monthly
  • Savings can be used to meet financial goals 

 

2 Demerits of Group Savings 

Certain disadvantages come with participating in group savings. 

  • Risk of default from members
  • Risk of theft or fraud, as a member who has received contributions, can elope without remitting subsequent returns

 

How to Start a Savings Group

You can start your own rotating savings group with little hassle. All it takes is for people with the same objectives to come together. Because trust is the bond that binds people in a savings group together, the best place to recruit members for a savings group is from your friends or family.

This is because you want to make sure that every member's character can be vouched for, and can meet the monthly contributions without adding an extra burden to their present financial commitments. 

It is crucial to formalize agreements for contributions and payouts through verifiable documents and secure financial accounts.

Clearly outline the contribution period, the amount which each member would contribute which is usually uniform, including provisions in case of a default.

You may decide to contribute to a member's account (usually the group initiator) or create an account to which all members would contribute to. 

There is also the possibility that members may want to swap positions in the future due to their financial situation. For example, a member may need to pay school fees, have a medical emergency or want to secure the money to close a deal.

As such, there should be provisions to handle such situations when they crop up. 

 

Should you join a savings group?

If you have a gathering of people with like minds and unquestionable character, then by all means join a savings group.

One, it is cheaper than obtaining a loan from a bank. Also, there is no penalty for late payment as members may be flexible and understand if there is a delay.

If you can't organize a group, fintech apps such as Tanda and Esusu offer the same service, though your group members would be strangers and not friends. 

 

Key takeaway

A rotating savings group is a cost-effective way of obtaining a loan. It also provides a support system that can help you develop savings habits.

Traditionally, these groups were between family and friends, however, fintech apps have made it possible to join a savings group without knowing the other members.

Albeit if you and those within your social circle are starting a savings group, make sure that all agreements are laid out and documented.

Photo by Alexis Brown on Unsplash

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