For many Filipinos, saving money is a tall task, which is why many can't save enough for their financial goals. This leads to one of the more common saving strategies among friends, families, and even co-workers called a Paluwagan.
In this post, let's discuss what is a Paluwagan, how it works, and its pros and cons.
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What is a Paluwagan and How Does It Work?
Paluwagan is a Filipino word that directly translates "to ease," which aims to relieve other people's financial woes or help each other.
A Paluwagan is an informal group saving strategy wherein group members pool a fixed amount of money in a set amount of time. Afterward, each member will take turns receiving a lump sum amount. You may liken it to the Rotating Savings and Credit Association (ROSCA).
For instance, five members agreed to form a Paluwagan, wherein each member will contribute P500 weekly. This means that there will be P2,500 in the money pool every week. Afterward, each member will be assigned a number to determine their turn.
For example, on Week 1, member #1 will receive the money pool amounting to P2,500 (including his own contribution). The following week, member #2 will receive the money pool of P2,500. This will continue until every member receives the full amount. Then, the cycle repeats.
- #1 - Week 1 (P2,500)
- #2 - Week 2 (P2,500)
- #3 - Week 3 (P2,500)
- #4 - Week 4 (P2,500)
- #5 - Week 5 (P2,500)
- Cycle Repeat
Advantages of Joining in a Paluwagan
1. You'll be forced to save.
Once you join a Paluwagan, you are compelled to pay your dues on time, indirectly forcing you to save money. You are more likely to "pay" your treasurer the agreed amount so that no issues arise among the group members.
2. You can potentially access your savings earlier.
Another advantage of joining a paluwagan is you can have more money in "advance" if you are among the first recipients of the lump sum. For instance, if there are five group members, and you are the second in line, you can have five weeks' worth of money in just two weeks (seems like a pyramid scheme, isn't it?).
3. Joining is easy.
Joining a Paluwagan is relatively easy, mainly because it's common at work or among friends. There is also Paluwagan available online, such as through Facebook groups and websites. However, paluwagan online is more complicated to track since you may not know the people involved or if you're just joining a scam.
4. It can strengthen a sense of camaraderie within the group.
If you join a Paluwagan with other people with the same agenda of saving money for a specific goal, like a cellphone or a grocery fund, connecting with others with similar goals can improve relationships, especially if everyone is doing their responsibility and paying on time.
Disadvantages of Joining a Paluwagan
1. There's a risk of people not paying.
The biggest risk for a Paluwagan system is group members not paying on time, if not at all. This commonly happens when an earlier member stops paying after receiving their payout. This exposes the members at the end of the cycle to more risks. The risk is higher if you're joining a paluwagan online.
2. The system is based mostly on trust.
When the whole system is based on trust, how will you ensure that other people will take responsibility and accountability for paying after they have already taken their sum of money? What happens is if someone breaks their responsibility, it also breaks the trust and bond, leading to broken relationships.
3. You Can't Practice Your Savings Habit.
The most important thing about saving is developing the habit of saving. By constantly joining in Paluwagan systems, you're developing a habit of instant gratification.
4. Your Motivation is Short-Termed.
Another disadvantage of a paluwagan is the motivation to join, which is to receive a lump-sum amount earlier. However, that motivation will only last as soon as the paluwagan season stops.
5. You Will Earn Very Little to No Interest
Since a paluwagan is usually on a cash basis and is not invested, there's almost no room for earning interest unless you put it in a digital bank. However, it would usually be pointless since the money must be given to the next member to "sahod."
Verdict: Should You Join in a Paluwagan?
Based on the advantages and disadvantages of joining a Paluwagan, the disadvantages and risks are too great and shouldn't be ignored. At times, these Paluwagan systems become "pagipitan."
There are things you can also learn and habits you can develop once you start your own saving journey without the help of Paluwagan.
As a verdict, you should refrain from joining a Paluwagan as much as possible.