For those unaware, Filipinos have their own unique way of saving money. Paluwagan is an informal way of saving as a group. It works based on the trust of each member of the group, usually consisting of at least three people. The participants will pool their funds and will receive lump-sum payouts based on a set interval.
While the practice is unregulated, a financial inclusion survey from the BSP shows that 14.8% of households save their money through paluwagan. Throughout the years, it remains an easy way for Filipinos to become financially responsible while also fostering camaraderie with each other. Even though this is a very simple way to start saving, the more important thing to remember is that it helps people get started.
“Saving a small amount soon builds up to a large amount”
How Paluwagan Works
As mentioned, Paluwagan requires at least 3 people to participate. These people would need to set rules such as
- How much the contributions should be
- When their contributions should be scheduled
- Who will receive their payouts first, and lastly
- Who will handle the funds
To give fully showcase how this works, it might be best to explain it through a story:
Jobert, Anne, and Miguel all decided that they want to make a Paluwagan group among themselves. They set that each member will contribute PHP500 every Monday. The payout will be on Fridays, with the order of recipients being Jobert, Anne, then lastly Miguel. Anne volunteers to handle the funds for the group.
With that, on the first Monday, everyone contributes PHP500 with Anne safekeeping the funds. On the first Friday, Jobert will receive PHP1,500 as his payout. Then on the second Monday, everyone will give their contributions again. This time, Anne will receive the PHP1,500 payout on the 2nd Friday. This cycle will continue until each person receives PHP1,500. At the end of the cycle, it’s up to them if they want to do another cycle or if they should stop.
Pros and Cons
One of the main benefits of paluwagan is that it is an inclusive practice. Since the participants themselves set how much contributions can be, low-income households are able to join.
Depending on how strict the group is, the practice also allows Filipinos to benefit from a framework that makes it easier to be responsible with their money. Rather than having to discipline oneself alone, paluwagan creates an accountability group between the participants. Everyone aims to push each other to save since the fault of one will adversely affect others.
On the other hand, the main disadvantage of paluwagan is that fraudulence could happen. Especially if the group isn’t tight-knit, some members could suddenly disappear the moment they receive their share. Since this is just done informally and usually with no written agreements, money could be lost if some members aren’t trustworthy.
Also, since the money is circulated between members, interest isn’t earned. However, some banks have already started providing group-savings accounts that could help with this. The participants would just need to talk about how they will manage the account, and the money that comes in.
Final Thoughts
For those seeking to enhance their finances, Paluwagan can be an appealing option. However, it’s important to take precautions and make wise choices. Making sure the members are trustworthy should be prioritized. Utilizing different tools to keep track of contributions, and even making use of what digital banks offer could be a great way of improving the experience as well.
Overall the practice should be seen as a first step towards financial freedom. Once you’ve got the habit of saving down, it’s important as well to learn how to make your money work for you.
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