What is a Money Pool? How does a Money Pool work, and what are its benefits?

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Wondering what a money pool is?

A money pool is one of the world’s oldest savings mechanisms in which each member of the pool contributes the same amount of cash each month for a certain period of time. Each member takes turns to receive the pool amount.

Money pools are also called chit funds and rotating savings and credit associations (ROSCAs). These types of saving schemes predominantly exist in developing countries, where access to credit is poor. Money pool remains a way of life and is a fundamental example of peer to peer lending or people helping people.

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How Does a Money Pool Work?

There are two methods of pooling money – offline and online. Let’s look at these methods in detail:
  • Offline Money Pool

    In the offline method, a group of people, mostly friends, neighbours, and relatives, come together to pool money. They decide the amount that each member has to contribute every month to create a pool. Every month, based on the lot system or draw and sometimes even on mutual understanding, one member of the group receives the money pool amount. The process continues until all the members of the group receive the money at least once.

    Example: Let’s suppose there are three people in the group – X, Y and Z – and they decide to contribute ₹500 each month. In the first month – X, Y and Z – contributes ₹500 each to create a pool amount of ₹1500. Based on mutual understanding or a draw, the first-month pool amount of ₹1500 is given to Z. For the second month, the pool amount of ₹1500 is given to Y, and in the third month, the money pool amount of ₹1500 is given to Z. Whether the member receives the pool amount for that month or not, the contribution of each member continues.

  • Online Money Pool

    The Money Club is an online money pool platform, where the concept and procedure remain the same as the offline schemes. Instead of physically forming a group and pooling money, it is done through an online platform. The group is formed online, and people contribute the decided amount periodically for the duration the same as the number of participants. An open auction decides who takes the pool amount. During the auction, the members bid for the pool amount, and the one who wins is the one who agrees to claim the lowest pool amount. The winner needs to pay a commission to the Money Club separately.

    Example: Let’s assume that a money pool scheme has 20 members, each contributing a monthly instalment of ₹500 to have a first-month pot of ₹10,000. Let’s assume the winning bidder wins ₹8,000 of the total pool value for that month; the ₹2,000 of the pool amount left is equally distributed among the other 19 members after the online money pool organiser’s fees are subtracted.

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Who Uses a Money Pool?

People have been pooling money for over seven centuries in India, and even today, it’s a very popular saving and borrowing scheme among the following people:
  1. Lower-income group
  2. People with bad CIBIL credit score
  3. People who don’t have access to banking facilities
  4. People worldwide living in poverty
  5. People looking to borrow or save money

What are the Benefits of a Money Pool?

  1. Trusted Financial Community: People form groups with the people they trust, which they can leverage upon in times of contingent needs.
  2. Zero Documentation: Absolutely no paperwork is required to loan money from the money pool.
  3. Disciplined Saving: Involvement in a money pool group encourages people to set saving goals and meet them.
  4. Dual Benefit: Money pool duals up as a powerful borrowing cum savings instrument.
  5. Loans at a Cheaper Rate: The borrowing interest rate is determined by the participants and not any external agency, allowing them to set a rate much lower than that of the banks.
  6. Higher Yield: Money in such schemes earn higher returns on contributions than Fixed Deposits or Recurring Deposits.