A stokvel should be managed by a trustworthy chairman and treasurer, who will be responsible for keeping records and managing the bank account

DID you know that stokvels play a major role in the South African economy?

If you have not joined one yet, it's about time you did.

A stokvel can help you pay for your child's education, buy a car, put down a deposit on a home and more.

Bongiwe Mkhwanazi a single parent of five, says joining a stokvel compelled her to save for her children's education, and helped her acquire household necessities she would not have been able to buy for cash things such as blankets and many other items.

She is a member of three stokvels.

One of them takes care of groceries and meat, the other caters for blankets, duvets, or whatever a member wants or needs, the third one is for her investments.

"There are 10 of us contributing R2,000 each for 12 months and we penalise any defaulters to instil discipline," Mkhwanazi says.

They share the proceeds at the beginning of each year, she says.

Mkhwanzi says they don't withdraw the interest earned, and members can borrow from the stokvel funds, at interest.

The National Stokvel Association of South Africa says there are about 800,000 active stokvels in the country.

Stokvels help around 10-million South Africans save for a rainy day and to manage their finances, says a spokesman for the National Stokvel Association of South Africa.

Yunus Boda, a legal manager at Legal and Tax, says stokvels are legal.

He says they have been around in South Africa for many years.

He describes stokvels as groups of people, who make contributions to a common fund from which each member can withdraw money, for various purposes, such as putting down a deposit on a home.

Boda says 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."

He says the money collected in a stokvel is often exposed to better interest rates and lower banking fees than the bank might give you for the rands you save each month.

"In this tough economy, in which 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 payout when you need it," says Boda

But investing in a stokvel is not without risks, says Boda.

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 might look as if you'll get lots of money when your payout 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, says Boda.

But all members need to discuss how the money will be invested and agree about the risks they are willing to take on.

"Investments on the stock exchange, for example, might generate better long-term returns, but there is a bigger chance that you might lose money through an unlucky investment decision.

"Money in a savings account is a safe investment, but with low interest rates, the returns are low," Boda says.

If you are careful about the stokvel you join - or the members you invite - a stokvel can be your best friend come the day you need some money.