At this time, everyone needs money to fulfill their desires and needs. Many people work very hard to earn money but their income is meager, or many people need to borrow and save money – such people can use a money pool.
It is the world’s oldest money-saving mechanism. People have been pooling money for over seven centuries in India, the UK, the USA, and many other countries. By using a money pool, you can get money in a significantly more manageable way.
In this article, we will have a detailed discussion on the money pool.
Let’s get started!
Table of Contents
What is a Money Pool?
A money pool is a well-established group savings mechanism whereby each group member contributes the same amount of cash each month for a specified time. All participants share the pooled funds equally.
Chit funds and rotating saving and credit associations (ROSCAs) are examples of money pools. These saving schemes predominantly exist in developing countries. It is one-way people help each other in the peer-to-peer lending system.
How does a Money Pool Work?
There are two methods for pooling money-Offline method & Online method. Let’s have a look on both:
- Offline method
To pool money, the offline method involves a group of people, usually friends, neighbors, and relatives. Each member contributes a certain amount to the pool each month. The money pool amount is distributed each month according to a lot system or draw and sometimes even by mutual agreement among group members. This process continues until all the group members have received money at least once.
Let’s assume: that the group consists of three people – X, Y, and Z – each contributing $500 monthly. X, Y, and Z donated $500 each in the first month to create a pool amount of $1500. A mutual agreement or a draw decides that Z receives the first-month pool of $1500. In the second month, $1500 of the money pool’s amount is provided to Y, and in the third month, $1500 of the money pool’s amount is given to X. It doesn’t matter whether the member gets their share of the pool; they still have to contribute.
- Online Method
In the online method, the concept and procedure remain the same as in the offline method. An online platform is used instead of physically forming a group and pooling money. Online, the group is formed, and members contribute the agreed amount periodically. Pool money is then awarded through an open auction. In an auction, members bid for the pool amount, and the one winning is the one who agrees to claim the lowest pool amount. In addition, the winner must pay the club a commission.
Example: Imagine a money pool scheme with 20 members contributing $500 a month each, resulting in a $10,000 pot in the first month. Let us suppose that the winning bidder wins $8,000 from the total pool value for that month; the remaining $2,000 is distributed evenly among the 19 other members after the online money pool organizer’s fees are deducted.
How to Start a Money Pool?
To start a money pool, you have to gather funds from several people for a common goal. Participants contribute a small amount each month, and the total amount can be as high as $10,000. By the end of the designated period, which can be up to three months, the total amount can be collected. After the end of the specified period, the money can be withdrawn by each contributor. Group savings are made easy by using money pools.
What are the Benefits of a Money Pool?
- Trusted Financial Community: People form groups with the people they trust, which they can rely on in times of need.
- Zero Documentation: There is no paperwork required in loaning money from the money pool.
- Disciplined Saving: Participating in a money pool group encourages people to set savings goals and reach them.
- Dual Benefit: Money pools are both powerful borrowing and saving instruments.
- Loans at a Cheaper Rate: Participants set the borrowing rates themselves, not through any third party, allowing them to set rates that are substantially lower than those of banks.
- Higher Yield: These schemes generate more returns than recurring deposits or fixed deposits.
The money pool is a quick way of arranging finances to meet your diverse needs. Additionally, it’s convenient and you don’t have to pay interest, which is quite a saving. It saves you from depending on anyone.