(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)

Question: I just started my first job last June at a trading company in Manila. My co-workers have been inviting me to join them in the paluwagan at the office. From what I understand, those who join the paluwagan will contribute a small amount every payday. Then we can take turns taking home the whole pot every month for the rest of the year. This sounds good, but is this safe? -Maya

Answer: The paluwagan is an informal pooled fund practiced for decades in the Philippines in neighborhoods and offices. Any one can put up a paluwagan, inviting people to come in as members. Each member will contribute a set amount on an agreed date, and frequency of contributions can be daily, weekly, or monthly. One of the members is the designated collector.

On a specified date, monthly for instance, one member will receive all the contributed money. The next month, another member will receive the pot, and it goes on monthly until all the members have taken their turn to receive the entire funds contributed for the month.

The purposes of the paluwagan are to help members save, and to enable them to receive a bigger amount of money in one lump sum.

For some people, joining a paluwagan has been helpful, as they get easy access to credit and/or a bigger amount of money. However, anyone intending to join a paluwagan has to do these things:

1. Do a credit and character investigation on the people running the paluwagan. Since the paluwagan is an informal organization, there are no government regulatory agencies checking on the background of the people managing the fund. Every potential member must then conduct his own investigation to verify if the paluwagan is run by people who can be trusted. Otherwise, the member may find himself on the losing end if the fund manager or collector runs away with all the money collected.

This may be tricky, but among other things, try to find out if the fund manager or collector is deep in debt, has a bad credit history, or has a pending administrative, civil or criminal case. If results aren't good, it may be wise to steer away from joining the paluwagan.

2. Study the risks involved in joining the paluwagan. As stated, one of the things that may happen is for the fund manager or collector to run away with all the funds collected. This will result in all members not receiving any money.

3. It is also important to know the members of the paluwagan. Another thing that may happen is when one member refuses or cannot continue to pay his share after he has received the money pot. This will greatly affect the chances of all the other members to receive the money pot in full. How will the paluwagan managers handle such a situation?

Since the paluwagan is an informal nonregistered organization, members may not have much recourse when something goes wrong. The most one can do is to file estafa charges, which may drag over time and cost a lot, with no guarantee that you will get your money back.

If you need the money...
If you need to have a big amount of money, then instead of joining a paluwagan, it may be wiser to apply for a loan at a bank or a credit institution. Loans from a bank or credit institution may come in the form of a personal loan or salary loan wherein you don't have to present any collateral, or they may be in the form of an auto or housing loan wherein you need to present some form of collateral. Another option would be to get a cash advance against your credit card.

Dealing with a bank or credit institution will protect you as a borrower as you will be assured that interest rates will be at par with market rates, and your credit history will be firmed up, paving the way for more loans to be granted to you in the future should you maintain a clean credit record.

If you want help in saving...
If you're thinking of joining a paluwagan to discipline yourself into saving regularly, you can do the same by opening an account with a bank. These days it's easier to save as you can open a savings account linked to your payroll account, and you will just need to transfer funds to your savings account online or via phone every payday to instill the savings habit. You don't even have to go to the bank every payday.

Plus your deposits are insured with the Philippine Deposit Insurance Corporation (PDIC) up to the amount of P250, 000. There is no need to fear that your money will be taken by the collector for his personal use. And of course, while your money is in the bank, it will earn interest.

But if you really want to make your money grow...
Your money will earn interest at the bank while it is in a savings account or time deposit. But if you really want to make it grow some more, think of moving a portion of your money to a higher-yielding investment instrument.

Similar to a paluwagan, the mutual fund or unit investment trust fund (UITF) pools together money from several individuals. Each individual gets shares in the fund based on his contribution. The fund manager then invests the pooled money in money market instruments, bonds, or equities, depending on the nature of the fund. Having an investment in this way will allow you to potentially earn more as money market instruments, bonds, and equities have the potential to earn more than what bank accounts can give you. Then when you need the money, just pay a minimal exit fee, and you can get the cash equivalent of your mutual fund or unit investment trust fund based on their net asset value at such time.

A mutual fund is run by a mutual fund company, while a UITF is run by a bank. In both cases, you are dealing with institutions overseen by government regulating agencies. Both funds do have certain risks involved, so discuss with the fund manager or account person the extent of risk you are comfortable with.

Joining a paluwagan may work for some people, but if you want to lay down the foundation for your own investment portfolio and safeguard it, deal with creditable financial institutions instead. Years from now, you'll be glad you did.

(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )

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