How savings pools work
A savings pool is a group of people who cooperate to avoid the interest they would otherwise pay over a lifetime.
Those of us who borrow money can pay a very high price for our dependence on bank finance. The interest charged by banks for a home purchase, for example, can cost us, over the term of a mortgage, up to twice as much again as the actual cost of our home - sometimes even more.
Interest is a largely avoidable cost. It is possible to fund business activity or purchase a major item without having to save what it costs in advance, apply for a bank loan or pay vast sums of interest.
Money need not be a privilege I have to pay for. I can contribute as a member of a savings pool, creating with others a pool of free money: money I have a right to use when I need it. Contributing collectively means that the pool quite soon becomes large enough to enable major purchases.
When I want to buy a property or service, I ask the pool to buy it first and to give me immediate interest-free use of it. I contract to buy it from the pool over time, matching the benefit received by continuing to contribute throughout the payment schedule.
My group and my family avoid thousands of dollars of interest payments with a little teamwork. Spending free money - pooled contributions - means we receive far better value for what we spend.
Who benefits?
I and other contributors benefit. We get out what we put in. No one creams off any profit from our contributions.
How did you start your pool?
I signed a group agreement. We opened a bank account. I make a series of monthly payments. I receive statements of my personal contributions and those of my pool.
Do you receive interest on your contributions?
No. Any funds in an interest-bearing bank account remain there only until they are required for the next purchase.
What incentives are there to contribute to the pool if you receive no interest?
I build up a nest egg, I assist other members with purchasing and I earn the right to interest-free purchasing.
Can you withdraw your contributions at any time?
When I contribute, I may stipulate when I would like to withdraw funds. I may withdraw any part of my contribution whenever funds are available unless I am currently purchasing an item from the pool.
How can you be sure your contributions are safe?
We select signatories we trust, choose a low-risk bank (or three), consider each purchase application carefully and ensure that ownership of a purchased item resides with the pool until the purchaser matches the pool’s contribution.
Can you make a purchase as soon as you join the pool?
Yes. I do not need a prior contributions record. I do need credibility with my pool, however. I may offer the pool collateral, if necessary, while trust is being built.
How much can you buy?
All purchases are subject to available funding. Otherwise the limit relates to how much I am able to pay each month, given that I am required to contribute while making payments.
Who decides whether the pool will support your purchase?
All purchases are subject to pool members’ approval. A fair pool uses consensus processes to establish a set of guidelines for managing itself and evaluating purchases.
What if several of you want to make purchases at the same time?
One or more purchases may have to wait - but not necessarily for long. Purchasers continue to contribute while making payments, so the greater the demand on pool funds, the faster the flow into the pool.
I like the idea, but I don’t have too much to spare right now.
Making a start is the important thing. A contribution of $5 per month got me going. The value of my contribution accumulates with time as well as with amount.
Who’s going to trust you with the hundreds of thousands of dollars you want to buy a house?
When I want to buy a house, the pool buys it first and keeps title to it until I have paid in full.
What if you already have a mortgage?
I can apply to use pooled funds to pay off some or all of my mortgage whenever I like. Using free money converts my bank’s future profits - my unproductive interest expenses - into a nest egg of my own.
Is there a successful model for savings pools?
Quite a number of buyers’ clubs in New Zealand are using free money. Savings pools are based on principles adopted by the JAK Members Bank which has operated successfully in Sweden since 1965.
Why must you keep contributing while making payments?
A successful pool treats all contributions with absolute fairness. It is not enough to pay for an asset or service the pool has bought for my use; I must also contribute to the pool myself.
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To sum up:
Homes typically cost double or triple their purchase price, the interest on a mortgage usually exceeding the principal. When I have a mortgage, I have a home to show for the money paid to the vendor, but nothing to show for the sometimes more than twice as much paid to the bank.
Savings pools - essentially buyers’ clubs - vastly reduce the normal cost of money.
When I purchase an asset, my pool itself makes the purchase. I enter a purchase agreement with the pool and commence a programme of concurrent payments and contributions, obtaining title to the asset when all obligations to the pool are met. At that point, the lump sum of my contribution is available for me to uplift.
Relative strangers might use a form of collateral. For example, I may sell my $10,000 car to the pool to retire my interest-costing second mortgage. I then enter into a purchase agreement to buy back the car with a term that works for me, saving myself the second-mortgage interest.
A savings pool may have more to offer me than interest-free finance alone. A group working in a spirit of cooperation constitutes a greater pool of experience, skills and resources than I can normally access as an isolated buyer. Realising my pool’s added-value potential will bring further significant cost savings.
A savings pool can include a local business I can invest in, using money I may have to date preferred to lend out at interest. My shareholding means a relationship with someone I know who is accountable to me. I may have skills and contacts that can assist the business. A business not hamstrung by interest payments and associated costs is more likely to prosper.
Savings pools can endure to serve oncoming generations: they too will need to make major purchases and avoid interest costs.
Saving the tens of thousands of dollars it would otherwise cost to service bank loans is worth the modest effort involved in working through financial needs with others we know or can get to know. For further details and administrative support, contact Living Economies.