[From Savings Revolution blog, 2 April 2012 (with Kim Wilson)]
Setting money aside for planned expenditures or for a rainy-day fund is tough if you are poor and you feel like you have a whole back-log of things you’d like to buy today. Saving requires active planning of what expenditures to forego and what saving vehicles to use. The selection of specific saving vehicles is driven by three high-level choices.
The first high-level choice is the balance between liquidity and discipline. Discipline is about making it hard for people to revisit prior savings decisions, whereas liquidity is about having the flexibility to meet changing goals and circumstances. Discipline is required every moment you decide to forego current expenditures to put money into your cookie jar (we call this discipline in), as well as every subsequent moment you decide to hold back from raiding your cookie jar to satisfy current spending urges (we call this discipline out).
These little decisions that prevent depletion of savings can grow exhausting, adding up to what experts call decision-fatigue. Once fatigue sets in, self-control flies out the window. The poor according to Daniel Spears of Princeton University are particularly prone to the ravages of such exhaustion. To avoid the hazards of decision-fatigue both during acts of discipline in (hiving off a portion of income into a safety zone) and discipline out (restraints on spending or breaking the walls of the safety zone), savers require the aid of automaticity, a phenomenon that occurs when unconscious mental processes substitute for conscious ones.
Savings groups provide a larger safety zone for cash. The regularity of group meetings can help with automaticity at weekly, fortnightly or monthly intervals but not with the erratic intervals that make up daily life. Between meetings, members will have shunted designated deposit money into temporary safety zones. Thus, we can see the reason that VSLA-style daily slot savings - where members deposit money into a locked box between meetings - is popular where safety zones in the home are at a minimum.
The second high level savings choice faced by people is the balance between certainty and surprise. On the one hand, people want the certainty of knowing at any point in time how much is their saved balance (hence the popularity of passbooks and check balance capabilities on mobile-enabled solutions) and what is the return on that. On the other hand, people also value the feeling of surprise on breaking the piggybank, or on investing their savings in a riskier vehicle with more uncertain returns. An element of surprise carries more of a prospect of a different future. Their mental math might include a higher interest rate gotten from lending at riskier terms for riskier propositions or it might add in truer elements of surprise found in lotteries and bingo games. Safe, risky and surprising options might co-exist in a single group.
Let us take for example, groups in rural Nicaragua. Formed under standard procedures, these groups further adapted the ASCA model to suit the tastes of leaders. Most had a portion of their fund invested in reliable, profit-making activities of individual members. However, In addition, some began lending to individuals outside the group at high rates of interest; others decorated regular meetings with raffles (the amount of an individual wager matching that of a regular deposit); and still others added group enterprises to their list of permissible loan uses. While in the end these efforts proved lucrative, they presented serious risk to depositors: members had not embarked on such activities before.
Perhaps what groups cannot do so well is match financial risk and reward to varied member appetites. If one member does not want to gamble her precious savings for the promise of a pot of money, she may be doomed, particularly if she lives in a sparsely populated area with few groups, banks or savings alternatives. The opposite is also true: if a member feels clever or lucky, as part of a prim group she may have little opportunity to realize her gifts, and feel stuck with her group’s predictably slim returns. The trick then is for groups to match the certainty-surprise inclinations of its individual members with products that reflect those inclinations.
The third high-level savings choice faced by people is to balance between privacy and social drivers. People may have a strong preference to keep larger amounts of savings private given social pressures to share bounties. On the other hand, saving publicly helps create the commitment of regular savings which members find so important, yet such visibility has its drawbacks. Saving in visible ways can also be used to signal success or claim social status.
Consider the story of Sukrisisa in a tribal hamlet in India’s Eastern Ghats. Sukrisisa, more than sixty years old, had never saved before joining a local group. As she says, “saving for tomorrow is not in the mind of our tribe.” But once she got the habit of savings, she became addicted. Her group, however, was only one vehicle for her savings. “I put only the minimum into the common fund. It is a vote of thanks for teaching me how to save. But, I save ten times more in a sack, which I bury in the ground.” She is scrimping from her cashew harvest for a piece of land and wants no one to chip away at her treasure of $700.
Happily, groups offer members a chance to save in full view of one another. Perhaps what they might do better is allow individual members like Sukrisisa to sequester larger amounts of money. In some areas, short of following Sukrisisa’s approach of entombing her cash, this may be impossible. But in other areas, options do exist and could be more fully tapped by group promoters - individual savings accounts and group accounts at banks or credit unions or new ways to save and store via mobile money platforms. Complements to group funds are surely worth investigating.