A cold January morning made the mid-30s temperatures even cooler. But it was an important day for the young man who pushed himself to 30. He was about to face his entire family for asking for a loan to sow the seeds of his new business idea.
He had contributed to the family’s savings cycle, but this time he was seeking withdrawal.
What is the savings cycle?
A savings circle is a group of family members or friends who regularly contribute to a collective fund. Members take a turn or have access to a portion of the income when needed.
A savings circle can also be called a money pool. Or flip profit, and this is known as a borrowing cycle. The practice has many names around the world and among American immigrant communities, including tanda, soo-soo, or tontin.
It can be an informal gathering with regular monthly contributions and a disbursement or an individual request for funds approved by the group. Some savings circles preset automatic withdrawals for each member in a specific order.
The savings cycle that shook the world
Berry Gordy was 29 on that cold Detroit day in 1959, when she faced edgy family questions about a $1,000 loan from the Ber-Berry Co-op—named after her parents, Bertha and Berry. was named after. After lengthy discussions, the group voted to give him $800.
And with that seed money, Motown Records was born.
David Ellis, a digital media curator at the Motown Museum in Detroit, says Gordy’s parents created a thrift effort to help seed the family business ideas. Each family member, including spouses, contributed $10 monthly to the fund.
“The funniest part … is the interest that Berry Gordy had to pay. They were family, but they were still very professional people,” Ellis says.
Unlike many traditional family and friends savings circles, Gordy had to repay the loan and would be charged 6% interest if he didn’t pay off the note within a year.
However, repayment was not a problem. Motown Records became a music institution, and Gordy sold the label in 1988 for $61 million. A 50% share of the Motown song list earned Gordy an additional $132 million in 1997.
a chance encounter
Right out of grade school, Fonta Gilliam was working 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. If I remember correctly she was going to start a dry cleaner.”
The street vendor had six cash in her savings account.
“I remember being like, ‘Okay, this is cheating,'” Gilliam says. But the woman described how she had participated in savings circles with friends in her neighborhood for years, “and it was finally her turn”.
“I learned how many people around the world are using informal savings and lending traditions — sous-soos, tandus — as a way to build wealth outside of the banking system,” she adds.
Gilliam found that social savings circles in these under-banked and under-served communities often had lower default rates. The social factor is the main one. “People are more likely to maintain strong financial habits when their partner holds them accountable,” she says.
How to start your own savings circle
If you want to start your own savings cycle, enlist trusted friends and family. Emphasize “reliable”. In 2020, the Federal Trade Commission issued a consumer alert regarding pyramid schemes involving sou-sous.
Your group will need to determine the amount and frequency of deposits and the order of individual withdrawals. For example, if 12 members put in $100 per month and distributions happen monthly on a rotating basis for one year, who gets the first $1,200? This is an important consideration because while early withdrawals are essentially zero-interest loans, later disbursements are effectively an interest-free savings scheme.
Some savings circle apps have been developed in recent years, such as Asusu Savings and MyMAF, which manage debt circles established through Mission Asset Fund. And later this month, Gilliam and a team of fintech developers in Washington, D.C., are set to release a savings circle and social banking mobile app called Wealthy. While the group savings goals will be shared, funds in Wealthy will be linked to individual digital wallets, linked to payment cards and never interlinked.
And it all started with the chance that a Korean woman was looking to start a business in America.
“To be honest, it really changed my life. And I almost refused a visa to that woman,” Gilliam says.
This article was provided by personal finance website NerdWallet to the Associated Press. Hal M. Bandrick is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @halmbundrick.
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