Money pools provide a platform for friends, relatives, or colleagues to combine their savings. The purpose of this arrangement is to leverage each member’s financial resources to save money, reach short-term money goals, or create financial security.
While money pools gained popularity centuries ago in developing countries, such as India and Southern Africa, they have continued to provide a banking solution for migrant communities in the U.S. Here’s a look at how money pools work and how they benefit folks that don’t have access to traditional banking products like savings accounts.
Read on to learn:
• What is a money pool?
• How do money pools work?
• What are the pros and cons of money pools?
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What Is a Money Pool?
So, what are money pools exactly?
A money pool is when a group of individuals (friends, family members, neighbors, or coworkers) combine their savings into one pot. The group decides on a monthly contribution amount they will each put into the pool.
Then, every month, one person from the group will receive the total sum of the money pool to do as they wish. The group can either draw names to decide who gets the money or make an arrangement based on a mutual understanding. Funds are distributed monthly until the entire pool is depleted. In this way, it’s somewhat akin to peer-to-peer lending.
However, money pools don’t just happen; they must have a responsible party that organizes the group. The money pool organizer tackles tasks such as collecting the money, tracking contributions, and planning distributions. The organizer keeps order, so each member understands and adheres to the group’s guidelines.
Money pools mainly exist in developing countries, with minimal access to credit or banking solutions like savings accounts. However, many U.S. immigrant communities nationwide use money pools as a solution for helping people within the community pay bills or save for financial goals. It can also serve as an example of pay-it-forward finance and helping those close to you.
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How Do Money Pools Work?
A money pool works like this: Let’s say a group of three friends decide to create a money pool. They decide that they will contribute $400 per month creating a $1,200 money pool. Each month, one friend from the group will receive $1,200. No matter who receives the funds for the month, every person in the group continues to contribute so the money pool amount always has $1,200 in it.
A money pool provides an immediate source of funds for someone needing to pay for unexpected expenses. In other words, the money pool can act as an interest-free loan to pay off medical expenses you can’t afford, car repairs, or tuition costs. A money pool can also provide a forced savings method for the last person who receives the funds.
The organizer usually determines who should receive the funds first. They may consider financial needs to assess the arrangement of the distribution of funds.
Reasons Why People Use Money Pools
For centuries, people have been using money pools around the world as an alternative to traditional savings solutions. However, folks are more likely to use money pools if they have:
• Limited or no access to traditional banking institutions.
• A bad credit score that making it challenging to qualify for financing.
• Minimal financial resources; the money pool can be a way to save money with a low income.
• The need to borrow or save money.
Examples of Money Pools
Money pools exist around the world and often go by various names. In U.S., Americans usually refer to this type of arrangement as a money pool or rotating savings and credit association (ROSCA).
Different communities call money pools by different names. Some examples of other names for money pools are:
• Tandas in south and central Mexican communities
• Cundinas between northern Mexico and Washington state
• Susus in the Caribbean
• Pandeiros in Brazil
• Hui in Asia
• Arisan in Indonesia
• Ayuuto in Somalia
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How to Determine if You Should Join a Money Pool
If a money pool piques your interest, consider a few key points before moving forward with this financial decision.
• Affordability of recurring payments. Make sure you can afford and have the money discipline to contribute the recurring payment amounts. A money pool isn’t like a traditional savings account where you can pull money out whenever you want. Think carefully to be sure that contributing won’t put you in a financial bind.
• Trustworthiness of key members. You may feel uncomfortable contributing to a money pool with a group of members you don’t know well. Instead, consider creating a money pool with people you know and trust.
• Organization of the money pool. Someone must be the organizer if you establish your own money pool. Money pool apps are available to help you organize your group and streamline contributions and distributions.
If you’re still on the fence, you may want to explore Community Development Financial Institutions or CDFIs as an alternative solution. What is a CDFI? These financial institutions cater to underserved communities. In addition, CDFIs offer banking products such as checking accounts to those who may have been turned away by traditional banking institutions. So, if you have a low credit score or are struggling to find a suitable savings vehicle, CDFIs could be worth considering.
Pros of Money Pools
Money pools can be advantageous to consumers for the following reasons:
• Provide access to cash. A money pool offers an alternative solution for accessing funds if individuals don’t have access to lending institutions.
• Members instill accountability. The social pressure of accountability encourages the group members to adhere to the money pool commitment.
• Interest-free loans. Money pools provide an interest-free way to pay for unexpected expenses like medical bills or car repairs.
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Cons of Money Pools
While money pools have benefits, they can also have some drawbacks, including:
• Funds in the account are not interest-bearing. Members can grow their money in other interest-bearing accounts, like a high-yield saving account.
• Members who don’t make payments put the group at financial risk. Members of the money pool could suffer a financial loss if someone doesn’t contribute when they are supposed to. This is especially true for the last member to receive the lump sum.
• Risk of social disapproval. You must make an agreed-upon payment or you could be kicked out of the money pool and face social consequences such as being shunned from your community.
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The Takeaway
Money pools allow a group of people to combine their savings while helping each other financially. Each member contributes to a fund of money, which is then disbursed to members sequentially, allowing every person involved to receive a lump sum of cash. While this type of savings vehicle is used in the U.S., it’s more prevalent in developing countries since financial resources are often limited.
3 Money Tips
- Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
- If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.
- When you feel the urge to buy something that isn’t in your budget, try the 30-day rule. Make a note of the item in your calendar for 30 days into the future. When the date rolls around, there’s a good chance the “gotta have it” feeling will have subsided.
FAQ
Is there a reason for developed countries to use money pools?
Yes, for communities with limited access to traditional banking and credit, money pools can offer a platform to help individuals achieve their financial goals.
Are money pools safe?
While there is a risk of members failing to contribute to a money pool, the peer pressure of the group usually ensures they will go to great lengths to make timely payments. So even though it’s possible, loss typically occurs only rarely.
Do money pools still exist?
Yes, money pools exist. You may find them in developing countries as well as the U.S.
Photo credit: iStock/bob_bosewell
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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