Portfolios of the Poor - Building Blocks

This chapter of Portfolios of the Poor is the reason why I so desperately wanted to read this book and introduce it to our community. Starting with the basic premise that each of us desires to pursue our dreams, the authors look at ways their profiled families are creating usefully large sums to make those dreams a reality. As is true in the developed world and the developing world, richer families are offered a suite of products, services, and tax breaks to help them build these large sums. However, as POTP points out, many of these tools are not available to low-income families (this is true in the U.S. as well, see here).

In the absence of many formal tools, the chapter addresses the way families cobble together useful sums by accessing a diverse set of informal products and services. First, they address the common uses of these sums: life cycle uses (like weddings, funerals), emergencies, and opportunities (i.e. education, business investment). These goals are common human goals - no matter if you live in a developing nation or in the U.S.

The authors categorize the tools the families are using into two groups - accelerators and accumulators. Accelerators are loans that are used to give households access to cash immediately. Interestingly, many households use loans to access lump sums even when they have savings. For these households, the pressure created by loan repayments creates a discipline that forces them to save to repay. They worry that rebuilding a savings balance is too difficult. I'm sure many behavioral economist would have much to say about this!

The accumulator analysis is particularly relevant to us. Accumulators in the case of the POTP households occur in the form of different savings groups. These include Saving-Up Clubs, ROSCAs, and ASCAs. The common trait across each of these groups is the organization of a series of small pay-ins into a single large payout facilitated by an intermediary deposit keeper. Yet, while these mechanisms work many of them can be hard to access, unreliable, too short in time, and mismatched to the cash flow of the household.

Instead, the authors outline a series of key principles that would make for a more effective solution to savings products. These key principles are:

1. Accessibility - available to urban and rural households, easy to understand
   
2. Security - insured, trusted account in a formal institution
   
3. Flexibility - pay-ins that match cash flow, flexibility in use of saving
4. Commitments - scheduled pay-ins

This chapter has re-confirmed my belief in the power of matched savings programs. I believe the matched savings programs we are profiling at SaveTogether meet all of the criteria introduced by the POTP authors. In addition, our community is built on enabling an important fifth principle - incentives. (Innovations for Poverty Action has some great research on the use of incentives for savings in developing countries)

1. Accessibility - available at over 500 program across the U.S.
   
2. Security - accounts are held at FDIC-insured banks or credit unions
3. Flexibility - saving sums can be used for multiple asset types, emergency withdrawals allowed
   
4. Commitments - savers must set a goal, make monthly deposits, and attend financial education classes
   
5. Incentives - anywhere from a 1:1 match to a 3:1 match

I'm excited that our savers have access to a program that works and that we can offer you, our community, a way to amplify this program. Of course, as we continue to grow, I think we'll have to consider whether it makes sense to help make this kind of savings program available to communities outside the U.S. The question to our community is: Are you interested? Will you support programs and their savers outside of the U.S?