What is a Savings Circle and how can it help you reach your financial goals?

A windy January morning made the temperature 1°C even colder. But it was an important day for the young man: he was about to face his whole family to ask for a loan in order to start his new business idea.

He had contributed to the family savings circle, but this time he asked for a withdrawal.

A savings circle is a group of family members or friends who regularly contribute to a collective fund. Members have access to a share of the proceeds on a rotating basis or as needed.

A savings circle can also be called a money pool. Or flip the advantage, and it’s called a lending circle. The practice goes by many names around the world, including tanda, sou-sou and tontine.

This can be an informal meeting with regular monthly contributions and disbursement or an individual funding request approved by the group. Some savings circles predetermine direct debits for each member in a particular order.

Berry Gordy was 29 on that chilly Detroit day in 1959 when he faced pointed family questions about a $1,000 loan from the Ber-Berry Co-op – named after his parents, Bertha and Berry. After a long discussion, the group voted to give him $800.

And with that seed money, Motown Records was born.

David Ellis, curator of digital media at the Motown Museum in Detroit, said Mr Gordy’s parents created the savings effort to help seed family business ideas. Each family member, including spouses, contributed $10 per month to the fund.

“The funny thing…was the interest that Berry Gordy had to pay. They were part of the family, but they were still very professional people,” adds Mr Ellis.

Unlike many traditional savings circles of family and friends, Mr. Gordy had to repay the loan and had to pay 6% interest if he did not repay the note within a year.

However, the refund was not a problem. Motown Records became a music institution, and Mr. Gordy sold the label for $61 million in 1988. A 50% share of Motown’s song catalog earned Mr. Gordy another $132 million in 1997.

After completing graduate school, Fonta Gilliam worked as a US foreign service officer in South Korea, “stamping visas at the consulate.”

“This lady walks up to my window…wanting to immigrate to the United States to start a business. She was going to open a laundry if I remember correctly.

The woman, a street vendor, had a six-figure sum in a savings account.

“I remember thinking, ‘OK, that’s fraud,'” says Ms. Gilliam.

But the woman told how she had participated in a savings circle with friends in her neighborhood for years, “and it was finally her turn” to make a withdrawal.

“I learned how many people around the world use informal savings and loan traditions – sous-sous, tandas – as a way to build wealth outside of the banking system,” she adds.

Ms. Gilliam found that social savings circles in these underbanked and underserved communities often have low default rates. The social factor is paramount. “People are more likely to maintain good financial habits when their peers hold them accountable,” she says.

If you’re looking to start your own savings circle, reach out to trusted friends and family members. Emphasis on “trusted”.

Your group will need to determine the amount and frequency of deposits and the order of individual withdrawals.

For example, if 12 members contribute $100 per month and the distributions take place every month in rotation for a year, who receives the first $1,200?

This is an important consideration because early withdrawals are essentially interest-free loans, while later distributions are effectively interest-free savings plans.

A few savings circle apps have been developed in recent years, such as Esusu Savings and MyMAF, which manages lending circles set up through Mission Asset Fund in the United States.

And later this month, Ms. Gilliam and a team of FinTech developers in Washington are set to launch a savings circle and social banking mobile app called Wellthi.

While group savings goals will be shared, Wellthi funds will be linked to individual digital wallets, linked to a payment card and never mixed.

And it all started with this chance meeting when the Korean woman was looking to start a business in the United States.

“It really changed my life, to be honest. And I had almost denied this woman a visa,” Ms Gilliam says.

Updated: July 08, 2022, 04:00

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