When you think about future goals and investments you think about saving money in a bank or other financial institution.

If you want to borrow money then you probably think the same. But there’s a financial trend sweeping the world that’s actually been around for a number of decades.

Instead of going to a bank for a loan, some people are creating savings circles with their friends or family members where they deposit a certain amount each month into a collective fund. Then when they need a loan they can ask for a withdrawal.

It’s an idea that is very strong in America.

Motown founder, Berry Gordon asked his family for a $1,000 loan. After his family, who had formed Ber-Berry Co-op discussed the matter, they agreed to lend him $800 and with that loan, Motown Records was born.

Gordy had to pay back 6 per cent interest if he didn’t pay the debt back within a year, however, that wasn’t an issue for Gordy and he sold the record label for $90 million in 1988.

Really Simple Money looked for savings circles in Australia but wasn’t able to find any. If you know of any we’d love to hear from you.

How to start a savings circle

Before setting anything up with friends or family and getting them involved in your finances you need to ensure that you trust them.

When you’ve decided who you’re going to start a savings circle with, your group will need to decide the frequency and amount of deposits. You’ll also need to consider how the money will be distributed. Will it be done on a rotating basis or assessed based on needs?

If nobody wants to withdraw the money you will also need to calculate interest payments. Will interest be paid back to the investors at regular intervals or will you leave it in the fund? These are just some details that you need to work out before you start a savings circle.

Finder credit card expert, Amy Bradney-George says: “While a higher cash rate is bad news for mortgage holders, it’s good news for savers as rates on savings accounts go up.

“By pooling money for a savings fund, you’ll likely be able to earn more in interest. However, pooling your savings with friends or family can test your relationships and put your finances at risk.

“People’s plans and situations can always change. You could be regularly contributing to a fund and then have a falling out with your friend. Or their financial circumstances could drastically change and they need to urgently take their money out, leaving you with little notice.

“There’s a real risk with these schemes – you really have to know what you’re getting into and maintain good communication with everyone involved.”

Money mentor Adele Martin likes the concept of getting into good savings habits and talking about money but says that issues could arise.

She says: “What if you put in more than you get back? What if a member wants to stop paying and wants money back but there isn’t enough? What if you got divorced?”

She has seen an instance where it did work though: “I have seen a sort of savings circle where a group of friends save each week into an account and go away at the end of the year together. But again, if it’s just in one person’s name/controlling it, this could have issues, like what if they got sick? How would you access the funds?”

Ms Bradney-George says that before you invest your money in a savings circle you should chat to someone you trust about your money goals and that you don’t have to pool your savings to do that.

“If you’re actively looking for ways to save money, a simple first step is to look at where your money is going. This helps you find “quick wins” by adjusting how you spend and doesn’t require input or buy-in from anyone else, the way a savings circle would.”

Ms Martin says to avoid the risks: “You would probably need a lawyer to draft a contract with all the conditions.

“Or if you didn’t want to go to that length you could just draft your own rules. But in this case, I would probably only contribute what I would be comfortable with losing as there may be no way to get it back.”

 

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