South African stokvels have been around for over 100 years – and they’re as widely used today as they were a century ago. Stokvels may have started out as informal savings clubs to assist with groceries and burial costs, but today they help members save for diverse needs from education, to family emergencies, to holidays. With so many investment options available it’s worth asking – is it better to use a stokvel or to use a bank account to save for your financial goals?
We couldn’t come up with one answer to this question because it depends on many things including what kind of a saver you are and why you are saving.
Here are the key questions to ask to find out which is more suited to you.
Have you got a common goal?You need to agree on a common goal for the stokvel to be successful. Different stokvels have different goals and ways of operating. For instance, you might contribute and meet each month, and distribute the collected money to one member on a rotating basis. Or, your stokvel could collect funds each month and distribute them equally among members at the end of the year. Or, you could decide to save for a five, 10 or 20 year goal such as a home or business, in which case, the stokvel would collect money each month, invest the funds and distribute them a few years down the line.
The aim of the stokvel should be outlined in its constitution. You can find a sample constitution on the National Stokvel Association of South Africa’s website.
If you share the common goal and are prepared to save according to the stokvel’s rules, pooling your funds may make sense. By investing together you can save on any investment charges or bank fees, and you may be able to invest in things not available to smaller investors such as a property or large livestock.
If you don’t share the common goal, setting up your own account makes more sense.
Are you a disciplined saver?Sharing an investment goal can make you a more disciplined saver. There are many stokvel members who agree and studies have shown that one of the biggest advantages of belonging to a stokvel is that it makes you more disciplined because you don’t want to let the other members down.
Being part of a stokvel usually means that you can’t dip into the funds for ad hoc items so you should be more likely to achieve your goal. Many stokvels have bank accounts, but they will have signatories, usually at least two, so accessing the funds isn’t as easy as when you have your own account.
Some stokvels do loan money to members in times of emergencies, so this can be an added bonus, but don’t expect it. Interest is usually charged and the rate should be stipulated in the constitution.
Do you trust the people in your stokvel?Unfortunately there have been many financial scandals in South Africa ranging from small one-man scams to part you and your money permanently, to large scale banking fraud.
A key to any successful stokvel is trusting the members in your group. Along with creating a disciplined savings habit, stokvels have a great social element where members meet, share stories, ideas, and have social evenings getting to know each other. This makes it easy to know who the people in your stokvel are, where and how you can get hold of them and their families.
Stokvels should have some rules so members know how they should behave and how the money is managed and what happens if a member doesn’t follow the rules.
Compared to a bank or investment account, however, stokvels are less formal, and there is a risk that a member can take the money and disappear.
Bank accounts are formal and regulated, so if there is a case of fraud the regulator should be able to assist with the return of funds.
However, it is important to note that neither is foolproof. A lot of stokvels held money with VBS Bank, which has since stopped trading. So it’s important to investigate your bank thoroughly if you’re going to go the bank account route.
What do you want to invest in?If your stokvel distributes money collected each month, a bank account makes little sense. Members will simply come together, socialise, share funds and give them to the member appointed to receive those month’s contributions.
However, if your stokvel has a longer term saving goal you may decide to look at different kinds of investments. A stokvel offers more flexibility than a traditional bank account because you can invest in a variety of different schemes such as property and shares in companies, earning investment returns in addition to interest. In a bank account your money only earns interest.
For example, investing in a property can provide rental income and the value of the building can grow over time which means you are more likely to grow your wealth over the years. There is slightly more risk – your tenants may not pay on time, and you will have to carry out building maintenance so that your property doesn’t fall into disrepair, but over 10 years with the right building you should have grown your funds substantially more than if they are in a bank earning interest.
Are you okay carrying cash around?This is a big concern for stokvels who don’t transfer money electronically and deal in cash only.
Financial Planner Gerald Mwandiambira says in his book My Money that you can counter some of this risk by making sure more than two people accompany cash when it travels, or splitting up large cash amounts among different members so there is no risk of losing all the money in one crime.
He also says that you must confirm the account recipient when you transfer money electronically because there are people who will give you their personal bank account details, accept your deposit and disappear.
While a bank account lessens some of this risk for a stokvel, bank accounts can be onerous to open. In some cases at least five signatories are needed with their SA IDs and proof of address.
How’s your record keeping?This is an advantage of bank accounts – you have monthly statements showing all the ins and outs so there is a permanent record of transactions and you don’t need to worry too much about keeping ledgers and cash flow statements.
It is important to keep your stokvel’s financial records in good shape so that all the members know where the funds are, and what interest or investment returns they earn. The stokvel’s treasurer should be assigned this duty, but even if your stokvel is not this formal, it’s a good idea to appoint one or two people whose job it is to keep a check on the money.
Do you want to learn about money management together?Stokvels can teach us how to manage money, how to share money, how to deal with unexpected financial events, and generally good money habits. As an individual saver, you might find that your interaction with your bank is usually limited to a login and password.
Stokvels can also be a great way to introduce our children to good financial habits. When our children see how important saving is to us, they may be more likely to save for their financial goals, and may even decide to join the stokvel or set up their own.
A final thoughtThe main difference between saving in a stokvel and saving in a bank account is that when you save in a stokvel you are part of a group of people all saving towards the same financial goal. If you save your money in a bank account it is your individual account and only you save and only you can spend the money. There are a lot of benefits we gain by saving in stokvels but it really is important to trust your stokvel members and share a common goal.