Stokvels quietly play a major role in the South African economy. With around 800,000 active stokvels in the country, according to the National Stokvel Association of South Africa, they help around 10 million South Africans to save for a rainy day and manage their finances.

Stokvels have been around in South Africa for many years and are perfectly legal.  They are essentially groups of people who make contributions to a common fund from which each member can draw, often for a purpose such as making a deposit on a home.

Why you should be part of a stokvel

There are many benefits to a stokvel. They are a great way of forcing yourself to put away a bit of money each month and can provide you with a community network that helps you in ways besides saving money.

The money collected in a stokvel often benefits from better interest rates and lower banking fees than the bank may give you for the rands you may save each month.

In this tough economy where jobs are threatened and it is hard to get bank loans, it makes sense to save in a stokvel that will give you a nice pay-out when you need it.

Risky business

However, investing in a stokvel isn’t without its risks. There are a lot of scammers out there who claim to be running stokvels, when they are actually running illegal and risky pyramid schemes. It may look like you’ll get lots of money when your pay-out arrives, but these schemes usually run out of cash very quickly. The result is that you could lose your savings.

For that reason, you should only get involved in a stokvel if you know and trust the other members. Also, ensure that the stokvel has clear rules about how much money everyone will invest, who will manage the money, and where and how often meetings will be held. You must be clear on how often payouts will be made and when it will be your turn to benefit from the money.

A stokvel should be managed by a trustworthy chairman and treasurer, who will be responsible for keeping records and managing the bank account. But all members need to discuss how the money will be invested and agree about the risks they are willing to take on.

Investments in the stock exchange, for example, may generate better long term returns, but there is a bigger chance that you may lose some money through an unlucky investment decision. Money in a savings account is a safe investment, but with low interest rates, the returns are low.

If you are careful about the stokvel you join - or the members you invite if you run the stokvel - a stokvel can be your best friend on a day that you need some money. A stokvel can help you to pay for your child's education, buy a car, put down a deposit on a home, and more.

Here's everything you need to know about starting a stokvel.

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