As financial counselors, coaches and educators, it is important to recognize and understand various systems of saving and investing that culturally diverse populations and the underbanked might use. The use of money pools might not be the first choice that a financial professional might recommend to a client, but if a client is already using this system as a means of saving and investing, the financial professional can try to understand why the client prefers this method over traditional banking.
What is a Money Pool?
In some Latin American circles, it is called “tanda” or “cundina,” which means “taking a turn” or “doing a circle.” A mainstream term is the Money Pool, but the Latin American communities are not the only groups that use this system of investing and saving money. This type of payment system is also used by individuals in various ethnic communities including Chinese, Korean, West African, and Jamaicans (Gaynor, 2009). The practice can be seen in ethnic communities from Madagascar, Taiwan, Peru, Mexico, and Pakistan (Haden, 2013).
Regardless of the various names it can go by, immigrant and ethnically diverse groups of individuals often see it as a reliable means of saving and investing their money to meet needs. A Cronkite News article interviewed a man who described money pools as “a loan for the people who have the first few turns, and…a savings account for those who have the final turns. “It’s a very nice idea, as long as the group is made of trustworthy people.
How A Money Pool Works
According to Investopedia, the term money pool means “the funds from many individual investor that are aggregated for the purposes of investment, as in the case of a mutual or pension fund.” The concept of this smaller money pool is that there is a regular collection of a designated amount of money by a group of people that goes into a common fund. The members of the group take turns receiving the lump sum. The most common example of a typical money pool would involve about 10 individuals that all contribute $100 into the pool per month and take turns collecting the $1000 investment each, over a 10 month period of time (Haden, 2013; PopTech, 2014; Gaynor, 2009).
Typically the organizer of the money pool is the first to receive the first pool payment and the least-known individuals get the last payments because the system is built on social relationships and trust/confidence in those participating (Haden, 2014). There are certain groups of people that purposely select to get the money in later phases because they use the system as a means of saving, as the model has a built-in discipline to saving. This investing system utilizes social/peer pressure for conformity to the rule of the system and provides an incentive to be faithful with payments because failure to do so can result in injury to all investors and public exile from the community as a whole (Haden, 2013).
Who Uses Money Pools?
Individuals use this system of investing and saving for several reasons:
- They have poor access or lack the resources to utilize the services offered by traditional banking and financial institutions, so they fall back on a community system that is based on social relationships, reciprocity and trust (Haden, 2013).
- They do not have significant credit issues or a lack of credit and financial histories. Under these circumstances, their ability to use traditional banking services is impacted (Haden, 2013).
- They do not trust traditional banking institutions and prefer to borrow money from within the community or from friends and family (Haden, 2013).
When a client is using this system, it is important to find out if the money pool is linked to credit and payment history so this can assist the client in building traditional credit history and that they understand how this history can help them if they choose to transition to “mainstream” institutions.
Following the banking collapse and ongoing recession in 2009, money was tight and banking institutions were hesitant about lending money to anyone. Therefore, money pools increased within communities and were even beginning to be recognized as a means to build credit histories (Gaynor, 2009).
Money Pool Organizations
The Mission Asset Fund, a non-profit in the San Francisco area, worked with individuals with lower income with the mission of developing programs and skills to increase personal financial success. They realized that the money pools served as a form of disciplined and patient commitment to saving and could be positively linked with payment and credit building behavior. The program they developed helped increase the average credit score of participants by 52 points over a four-month period (Gaynor, 2009).
eMoneyPool.com is a digital, on-line tool that helps people to create their own private money pools among friends (nation-wide) with a 1-5% surcharge of the total pool amount for administration fees and to guarantee payment if another member defaults. Interested consumers can also participate in open pools developed by other eMoneyPool members. eMoneyPool.com aims to create a service that aids the underbanked by using a tool that is comfortable and familiar to them by linking their business to formal financial institutions that can monitor and establish credit history (PopTech;2014). Clients that use eMoneyPool can grant permission to share the payment history and credit rating collected through eMoneyPool and then share it with credit-rating agencies and direct lending institutions (PopTech, 2014). This allows the underbanked to develop a payment history and credit rating that can assist them in more traditional financial services like personal loans, car loans, mortgages, etc.
Professionals can still assist clients using money pools in planning and maintaining their financial goals and link the positive financial behaviors (patience, consistent payments, etc.) with more traditional services if the client is interested in bridging to more “mainstream” institutions and services.
- Haden, P. (2013, September 13). In Latino community, money pools a different approach to lending. Cronkite News.(http://cronkitenewsonline.com/2013/09/popular-in-latino-community-money-pools-a-community-approach-to-lending-saving/)
- Gaynor, Time. (2009, July, 2). U.S. migrant money pools thrive in recession. Reuters. (http://www.reuters.com/article/2009/07/02/us-usa-savingsclubs-idUSTRE5613J420090702)
- eMoneyPool is an online website and financial program that provides financial services that promote sharing community where members borrow and save together (http://www.eMoneyPool.com).
- Money pool: a centuries-old savings tool reinvents. (2014, January, 22). PopTech. (http://poptech.org/e5_francisco_cervera)
- Money pools: a centuries-old savings tool reinvented. (2014, February, 21). Christian Science Monitor. (http://www.csmonitor.com/World/Making-a-difference/Change-Agent/2014/0221/Money-pools-a-centuries-old-savings-tool-reinvented)
Guest Contributor: Suzanne R. Frie, AFC®