PAY ONLY THE PURCHASE PRICE FOR THINGS YOU WANT!
Imagine if you could buy a home – or something smaller like a fridge – for only what the vendor was asking. Whether the price is $1,000 or $300,000, that is what you pay – you’re not left continuing to pay more, in interest, to a bank.
Loan finance costs you more
If you buy your home or fridge and finance the purchase with a loan from a bank or finance company, you end up paying more – often much, much more – than the purchase price. For example (and while it depends on your circumstances and the terms you agree with your bank), if you buy a house on a traditional mortgage, sometimes you will pay as much or more in interest payments to the bank as you paid for the house itself.
Paying interest is a waste of money if there's an interest-free alternative
Most of us know that when we buy on credit, or take out a mortgage or finance company loan, we end up paying more, but we feel we have no choice because we need (or want!) the item now though we do not have enough cash to pay for it. If, however, there were a way we could access additional cash on an interest-free basis, then choosing to pay interest would be a waste of money.
Interest-free cash – how?
For centuries, people have recognised the benefit of pooling their resources, through co-operatives, buyers’ clubs, investment syndicates and the like. “Savings Pools”, where individuals combine their savings into a larger pool of funds, can bring with them similar benefits. Members deposit funds into the Savings Pool, and then take turns to access the Pool’s funds (say, to buy that fridge!) on an interest-free basis.
Are there Savings Pools in New Zealand?
Yes, there are Savings Pools in New Zealand (and in other countries – for example, the JAK Members Bank which launched in Sweden in 1965). Project Wairarapa members – some of whom are themselves members of Savings Pools – know of around 30 such Pools. One of Project Wairarapa's roles is to educate and inform communities and individuals – whether or not they are members of Savings Pools – on how Savings Pools could work.
Are Savings Pools legal?
Savings Pools are legal – provided the Pool members take care to ensure they abide by applicable legislation. Living Economies can provide information about the legislation that can apply, but its advice is necessarily general, and those involved with Savings Pools as members or prospective members, and persons considering forming a Pool, should seek their own legal advice.
Are there any risks?
Yes, there are risks. The principal risk is that a member does not pay back in full the amount borrowed. If that happens, you could lose some or all of your money. If the Pool has taken security, this will help reduce its loss, but there could still be a shortfall. Another risk is that a signatory could misappropriate funds held in the Pool’s bank account – that is, steal from the Pool. Usually, a Pool will require that payments from its account need two signatories, or will have other security measures in place with its bank, to reduce this risk. And, of course, your savings do not earn interest (that being the trade-off for the ability to borrow from the Pool on an interest-free basis).
How do I:
- Join a Savings Pool?
Project Wairarapa can provide contact information for Savings Pools in the Wairarapa, but it does not recommend or endorse any particular Savings Pool, and it is for each Savings Pool to decide whether to invite new people to join.
- Start a Savings Pool?
Talk to your friends, family and colleagues about the concept. Contact us for additional information about Savings Pools and how they might operate. We can provide information, but will not set up a Savings Pool for you, nor help you to manage it once formed. Members of existing Pools may be available and willing to assist with the setting up of, and mentoring for, new Pools.
- Find out more?
Contact us and we will endeavour to answer your questions, if we are able to do so.
How Savings Pools Work
As the name implies, members of a savings pool contribute to a joint account. Each member retains ownership of his/her contributions, but allows other members of the pool to use the money, as needed and agreed to by the pool as a whole. On joining the savings pool, members sign an agreement that sets out their rights and obligations. Members also sign a funding agreement when using the savings pool's funds, which sets out the amount borrowed and the rate of repayment.
Savings pools work on the principle of reciprocity: when a member uses the pool's funds, he/she is obliged to repay the money used and, at the same time, continue to save, thus increasing the pool for others to draw from. Reciprocity is achieved when the member's contribution equals the value he/she has received from the savings pool. The savings component of the repayments belongs to the member and may be uplifted as soon as reciprocity has been achieved.
In the example below a member has borrowed $10,000 from the savings pool (blue bars in the graph below) and agrees to repay it in 10 months. This requires instalments of $2,000 per month: $1,000 repayment (orange bars) + $1,000 contribution (yellow bars). After paying instalments for 10 months, the member has repaid the $10,000 loan, and has saved another $10,000, which is available for his/her own use, or for any member to use as long as it is in the pool. If used to pay off credit card debt for example, this loan could have saved the member several thousand dollars of interest!
If the same member had saved $1000 per month for five months before using the $10,000, it would have taken only five months to complete reciprocity.
This member could also choose to pay smaller contributions and take longer to achieve reciprocity.