Three reasons why ‘committees’ are a bad way of saving money

The age-old method is only marginally better than stuffing cash into a mattress in terms of returns, and is unfair to those who get the cash later

The person I first learned about ‘committees’ (pronounced ka-may-tee) from was my dadi. She wanted to buy a washing machine for the house, and so she called up my father’s aunts and asked them all to join a committee. Back then (this is the mid-1990s), the washing machine cost Rs2,000 and so she got 10 people to join a committee to each contribute Rs200 every month for the next 10 months. Since she initiated the committee, she got the cash first and was able to buy the washing machine almost immediately.

That, in a nutshell, is how most committees work: a group of people get together to pool a specific amount of money and every month the entire pot of money goes to one person.

First, let us start off with what is good about the committee system. It uses social trust and ties between family and friends as a means of getting a group of people to collectively force themselves to save money, and thus have access to a lump sum for large payments or purchases that might exceed their monthly incomes.

That, however, is the beginning and end of the advantages of the committee system. There are three reasons why it is bad, inefficient, and why the committee system – especially the single round committee, where all of the people go around only once rather than having a running committee – is actually unfair.

In this article, we lay out exactly how the shortcomings of the system. We will then lay out how people can overcome them to continue benefiting from the forced savings mechanism. 

  1.     It does not protect one’s savings against the impact of inflation

     

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    (Disclosure: The author is a founder of Elphinstone, a fintech startup that is working to create a free tool called SmartRupee that will allow users to set up automatic deposits into curated, diversified investment portfolios, based on their financial goals.)

    Interested in learning more about short-term savings? Have another question about personal finance? E-mail your questions to [email protected] Your identifying information will be kept completely confidential.

Farooq Tirmizi
Managing Editor, Profit Magazine. He can be reached at [email protected]

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