Max out your friends, not your credit card

A guy I worked with years ago (circa 1991, a time when a young Victoria Jackson was teaching America to laugh and Sergeant Slaughter finally defeated Ultimate Warrior for the WWF championship belt) told me about how when his father was a young salesman he was part of a "suit financing ring". Each ring would have, say, 10 friends or coworkers. Basically each person put in $5 a month. At the end of each month, one person would get a new business suit (10 people putting in $5 a month would give the fund $50 a month and I guess back then a good business suit would run you about $50). After 10 months, everyone had a new business suit and the cycle would continue.

I've thought off and on about this arrangement and always wondered why you wouldn't just put $5 a month aside and buy yourself a new suit after 10 months. Then last week NPR's Planet Money podcast had a story about similar "savings rings" which they called RoCSA (rotating credit savings associations). Other people call them Tandas.

I guess they are common in certain ethnic communities and areas where people don't have easy access to credit cards. NPR featured a story about women in a certain ethnic community who would form a ring and once a month someone in the ring would get new housewares or something.

Planet Money revealed the part of the financing ring or RoCSA or Tanda that I was missing. When you get the new suit or set of crock pots is drawn by lot. So the lure here is I put my $5 down along with 19 other people. Numbers are drawn to determine in which order suits are paid out. I have a 19/20 chance of getting a suit earlier than I would be able to do it by saving on my own.

This makes me wonder why more people, even those with access to credit cards, don't form these kinds of groups themselves. I want an iPod Touch but I don't want to cough up $200 right now. I find 10 friends who also want an iPod Touch. We each put in $20 a month. After 10 months I know I'll have one but there is a very good chance I'll get it sooner. I can wait 10 months because I currently have a crappy Zune. It's now out of warranty and given in the year I've owned it, I've had to ship it back to the Zune hospital twice, well, there's a reasonable chance I'll get my iPod Touch before my Zune fries itself. Again.

With the way technology goes, the ones who have to wait longer might end up being rewarded for their patience. If you draw a low number, you get the iPod early and are rewarded earlier. If you draw a higher number, you stand the chance your iPod is a new version with 32 gb of memory vs 16 gb.

The danger of these RoCSAs is they might not work well in environments with high inflation. I'm not sure how people who draw high numbers would feel if they got something less.

Another down side, you don't get any positive history for your credit rating using this system. Lots of people aren't very responsible with their credit cards but lots are. And nothing sucks like suddenly needing credit but having zero credit history for a bank or credit card company to look at.

Of course the other danger is people who get their iPod early might be reticent to keep contributing. This might be why they tend to work in smaller communities with highly homogenous ethnic populations tied by family, blood, and mutual support. Lots of peer pressure would keep you paying, or else. The door at church is barred, no woman in the community will marry you, etc.

In modern western culture, if your friends suck, you just get new friends. (Anyone want to be my friend?)