Paluwagan 2.0: Sophisticated Ways of Money Pooling
- Feb 17, 2018
- 3 min read
PALUWAGAN (noun) | pa.lu.wa.gan | origin: Filipino
1 : a money saving and lending system, popular among Filipinos (especially among co-workers and family members)
2 : the process of pooling a fixed and agreed amount of money, from each member of the group, as per agreed frequency. The pool of funds collected will be given to one member, who is scheduled to receive the sweldo (salary) on that specific collection day or month. Each member has to continue contributing to the pool every collection day until everyone gets paid an equal amount.
Example of paluwagan in a sentence:
Pedro decided to use the money that he received this month from his and his
friends' paluwagan to send a balikbayan box to his family in the Philippines.
Why Do People Join a Paluwagan?
Commonly present in Filipino communities, paluwagan is an easy and informal way of saving money. Most transactions are done in cash and are monitored by the assigned collector, who should be the trustworthiest among members. You know, someone who looks like this guy:
Though easy, paluwagans earn 0% investment return, involve 99.9% risk, and 100% instant gratification. So why do people join these? Paluwagans provide a sense of camaraderie and convenience, which are both important in the Filipino culture. It can be an easy solution to piling debts, financial obligations, or desired purchases without going through an extensive application and credit check.
How to Do Paluwagan in a "Sexier" Way?
There are numerous ways of doing your own paluwagan system without having to risk your money going astray. You might be thinking that your $50 per cutoff contribution would not create a huge impact, but from a financial perspective, it will do. The following are some ways to pool money responsibly:
Open a Tax-Free Savings Account or TFSA
Wouldn't it be much better to earn some returns on your contributions, free any growth from taxes, pull the money out anytime you want, and protect it all at the same time? Those are just some of the benefits of a TFSA. This savings account is registered, which means that the government (CRA) cannot tax you on any income that you earn from your investments. The TFSA has a limit (currently at $57,500*), which increases annually.
*certain conditions apply
How is this a money pool? In addition to your investments, there are also a lot of other investors who are contributing to the same group of funds (big company investments) that are managed professionally. These professional fund managers are responsible for increasing the value of your and your co-investors' pool of funds, hence the return on investments.
If you will contribute $50 bi-weekly and invest it in a TFSA for a year, with a conservative 3% rate of return, you will be getting an additional $17.41. It's the same amount of money, with some more! In a paluwagan, no one will lend you an extra $15 from participating, let alone $17.41. With a TFSA, however, you can open an account for free and earn at the same time.
Purchase a Participating Whole Life Insurance Policy
This one might be an unpopular advice, but it's worth the possible criticisms. Participating whole life insurance covers the same purpose as the usual permanent or term life coverages—a lump sum death benefit for your loved ones. It has more perks, however. If you're healthy, keen with your investments, and would like to reap more benefits from your buck, this might be a great option for you.
How does this work? You and other policyholders participate and earn from the profitability of the insurance company. There is a portion in your monthly premiums that is deposited and pooled in an account with other policyholders' contributions that are invested into the market. This account pays out dividends* annually and are credited into your policy, thus increasing its cash value. This accumulated cash value can be loaned, used as you see fit, and paid back by continually paying your usual monthly premiums.
*non-guaranteed
There are numerous strategies that you and your financial advisor can build around a participating whole life policy. Some of my clients use it as a supplementary savings fund and some as their own banking (lending and borrowing) system. Watch the video to know the basic differences between participating and non-participating whole life policies.
Get Paid the Earliest AND Invest
If you still can't let go of your traditional paluwagan membership, my last advice is to aim to get paid the earliest AND invest it in a TFSA or RRSP. This will allow your money to earn interest on the lump sum money that you've received from your group's paluwagan. While it's tempting to use the money to throw a lavish fiesta for your kumares and kumpares, it's wiser to use the money effectively and reap more benefits later on.
Please like, comment, and share this with your friends and family. Let me know your thoughts and personal experiences on paluwagan. Thanks for reading!
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