I recently watched a movie titled Living on One, a documentary about four college students’ efforts to spend a summer in Guatemala living on a dollar a day. (The movie is available on Netflix and is worth an hour to view.) As 50% of the citizens of Guatemala live on less than a dollar a day, the film explored the personal finance habits of people who have a hard time earning enough money to live on, much less save.
My favorite segment of the film discussed the concept of savings clubs, a popular strategy in less developed areas of the world. To illustrate how a savings club might work, consider a group of 12 individuals who each agree to save $12 every month. However, each member contributes their $12 of savings to the group every month, and one of the twelve members keeps the full sum of $144. The member taking the lump sum alternates each month, so that consequently, every member of the club receives $144 once per year.
As you likely already see, the purpose of the savings club is not to achieve investment growth. Each member contributes a total of $144 to the club each year (12 contributions of $12), and every member receives $144 once per year in return. So what’s the point?
The point is that in the arena of personal finance, it is often more beneficial to receive a large lump sum occasionally than to receive a smaller amount more consistently. In Guatemala, a large lump sum can be used to purchase a stove to cook food, while in more developed parts of the world a lump sum might be used to purchase a car or as a down payment on a home. The $144 lump sum is more valuable than simply saving $12 for 12 months because humans find it difficult to save money they have access to. Having smaller amounts of money available that can spontaneously be spent on nice dinners, vacations, or other small ticket items can ultimately be a drag on a person’s savings efforts.
Another benefit of the savings club is that they force individuals to prioritize savings. If a member of the club can’t contribute their $12 during any given month, they are kicked out of the group and will not collect the $144 lump sum they have been counting on. A factor that motivates savings is indescribably beneficial. Most people earn a salary, pay bills and have fun with that salary, and intend to save any funds that are leftover. Unfortunately, for most people very little is left after maintaining their standard of living, so very little gets saved. When we prioritize saving, we earn our salary, achieve our savings goal as soon as income is received, and find a way to live off what is left. This tactic ensures we are saving the amount required to meet our financial goals.