Stokvels remain an incredibly effective way of saving money for specific goals.
Each year, over 11 million South Africans use savings clubs and stokvels to save more than R50 billion. The tried-and-tested benefits of saving as part of a group can be used to build long-term wealth.
Allan Gray’s Tinashe Kunaka, manager in the Strategic Markets team, shares the advantages of joining a savings club to achieve your goals and some ideas to increase the likelihood of your success.
Rooted in history
For over a century, savings clubs and stokvels have helped generations of South Africans save money. Some savings clubs have focused on helping members save towards various things, including building a safety net to assist with funeral preparations – in the form of burial societies – or saving for their children’s education.
Mizi Mtshali, CEO of the National Stokvel Association of South Africa, says that many savings clubs are becoming multi-purpose groups by working towards a primary goal and investing any excess savings for long-term growth. Some savings clubs are solely focused on investing in property, financial markets and businesses on behalf of their members.
Savings clubs make use of personal networks to bring like-minded individuals and shared financial goals together. Members commit to contributing money on a regular basis and hold each other accountable along the way, increasing the odds of success.
What we have observed from stokvels is that shared accountability can be incredibly useful to help investors stay the course and realise their goals. In addition, by pooling their skills and resources, savings club members are able to make large investments that may otherwise be unattainable and share the risk that comes with any investment.
Investing in unit trusts
Many savings clubs invest in unit trusts to grow their wealth. Unit trusts offer investors easy, affordable access to financial markets. There are different unit trusts available that are suitable for different needs, objectives and time frames.
When a savings club invests in a unit trust, the money is pooled with that of other investors. This money is then used by an investment manager to buy shares, property, bonds, cash or a combination of these assets, in local or foreign markets, on behalf of investors.
Setting up your savings club for investment success
Savings clubs rely on a high degree of trust, dedication and transparency. Investing is a long-term journey. Therefore, it is key that members share the same vision and level of commitment. There are a few things you can do, if you are not doing them already, to lay the foundation for successful outcomes.
• Draw up a constitution: This is the founding document of your savings club. It should detail the club’s purpose, rules and regulations, and provide guidance for dealing with a wide range of scenarios, including what happens when a member resigns, defaults or passes away.
• Choose your members wisely: Running a successful savings club requires good leadership and a culture of trust. It is important to make sure that all members are on the same page and share similar values so that you can overcome disagreements as they arise.
• Formalise your club: It is a good idea to formalise your savings club’s operations by consolidating your documentation and opening a bank account in the name of the club. You should appoint capable members to oversee the club’s finances and administration, and detail these roles and responsibilities in the club’s constitution.
• Do your homework: As with any investment you would make in your personal capacity, any investment you choose to make as part of a savings club should be based on solid research. In addition to verifying that the potential investment is above board, you need to ensure that the investment is suitable for your investment horizon and goals.
• Take a long-term view: It is important to exercise patience when investing, as there may be periods when your investment underperforms and you will need the discipline to remain invested through periods of poor performance. By holding each other accountable to a long-term goal, savings club members can avoid making many of the emotional decisions that destroy long-term wealth.
• Get the right advice: Seeking independent financial advice can help savings clubs and their members avoid making expensive mistakes. Each member should consult an independent financial adviser to ensure that they are well positioned to benefit from the savings club’s activities. In addition, a financial adviser can ensure that the club’s investment choices are appropriate for its long-term goals.