Any type of social club involving money is a risky proposition for you, especially in today’s volatile economy. Your club membership morally and legally obligates you to commit a certain amount of money for a year or longer toward the group’s purpose. Friendships and families can become divided over disputes about money. And the more money you pool together with other people, the stronger their temptation will be to take the money and run. That is exactly why you need to choose your social saving or investing group members carefully, and why you should write an agreement that everyone signs.
Starting a Social Group for Savings and Investing
You can join both kinds of groups. You can also create a hybrid group that both saves and invests. But to do this successfully you need to set reasonable goals and simple guidelines. It will be up to the group members to police themselves and live up to their obligations.
Here are the basic steps you should follow to start your group. If you’re in doubt about legal requirements, consult a qualified attorney or financial adviser.
Step 1: Begin by performing due diligence. Reading this article is a start. You’ll need to look up tax regulations for social clubs. Check with your local bank to see what their guidelines are. You may need to register your social club with the state, or even incorporate it as a non-profit (exempt) entity.
You can try to do this informally. It’s not like the social club police are going to come knocking on your door, asking why you aren’t registered. But remember that moving large amounts of money around can quickly lead to questions. Banks are required to report certain types of transactions to financial authorities.
My recommendation is that if you’re going to do this informally you should limit your activities to social savings and that you should only pool small monthly contributions. Otherwise, it’s in everyone’s best interest to set up a legal entity. You’ll be able to open a bank account and change officers as required when you file paperwork.
Step 2: Write a membership agreement. Whether you incorporate or not, you need a set of rules that everyone agrees to. Now, if you are the person starting the club you can write an outline that lists the points you think the agreement should cover. Don’t be pretentious but show your friends that you have put some thought into this process.
A membership agreement should explain:
- Who can join the group
- How people join the group
- How the group operates
- How often the group meets
- How much each member contributes on a monthly basis
- How the money is handled
- Who handles the money
- How the money is accounted for
- How a member can leave the group
- How disputes are to be resolved
Step 3: Hold your first meeting. Getting everyone together will be the hardest part of launching your social savings club. Should you hold a party and then spring it on them? Should you set up a formal meeting? Although I find different opinions on the matter, I think you know your friends better than some random stranger does. You may have to feel them out to see who is even willing to consider the idea.
The first meeting will show you who is ready to commit to the idea of pooling resources with their friends. Some people may want to do this but they cannot. Some people may decide to go it alone. I would be very surprised if you don’t have a few friends who are skeptical of the idea, especially if they are not the first ones to receive any money from the club.
You’ll want to present your ideas in a concise, well-reasoned presentation. You need to make a business case for why anyone would want to do this with you. That means you have to explain the benefits they can expect (a lump sum of money once a year, plus the camaraderie of helping friends) and how you think the group can mitigate risks (such as someone dropping out of the group).
Step 4: Set the date for the first regular meeting. This comes after the organizational meeting. You should give everyone who decides to join time to come up with their first monthly contribution.
My recommendation is to schedule a weekend get-together once a month, every month. No one gives or receives money outside of that monthly meeting. You can have a dinner party.
The idea is to ensure that every member of the group treats this as a financial commitment. It’s just like paying their bills.
What Being In a Social Savings Club Really Means
What you and your friends are doing is lending each other money. Let’s say you agree to pool $100 per month for a year. That means every month one member of the group receives $1200 to do with as they please. After all, as long as they fulfill their 12-month contribution obligation, it really is their money.
You don’t have to give all the money to one person. You could divide it up among 2 or 3 people if that is what your friends want to do. The idea is that everyone walks in the door with their contribution and at least 1 person leaves with more than they brought.
Why should the person receiving money bring a contribution? This might seem like a ridiculous rule. But it’s really important that everyone in the group see everyone else in the group putting in their fair share of money each month.
And not only that, but it’s important that every member of the group become used to saving at least that much money out of their monthly expenses. The group may go their separate ways after 1-2 years, but wouldn’t it be great if everyone continued to save money each month after that?
Habitually saving money for future expenses is a great idea. And it teaches your kids to be financially responsible to themselves.
Your social savings club builds trust and strengthens bonds. While I don’t recommend you start a savings club with a group of strangers, whomever you pool resources with will come to depend on you and you will come to depend on them.
A small circle of friends who are working together to help each other manage their money comprise a support network that may be able to step in during other times of need. Think of who you can call when you need help with an emergency like a major storm or flooding. And your savings club friends may also be able to share errands with you.
You can work with your friends to manage money in other ways, too. As I mentioned above you could form an investing club, or use the savings club to double as an investing club. But you could also work with each other to save money on your monthly expenses.
The sky is the limit when you have a network of trustworthy friends who, like you, want to save money and grow their wealth.
Your social savings membership guarantees nearly everyone an interest-free loan. Of course, all guarantees are only as dependable as who gives them. Assuming you and your friends all meet your commitments, sometime within the next 12 months you’ll receive proceeds from the savings club. Now, if you only allocate money to one member a month you may be the last person to receive money. That means you were lending money to your friends all year long and they pay you back in the 12 month.
I hope you don’t feel cheated by the idea of lending money to your friends interest-free.
But if you pool enough money together that it makes sense to dispense funds to 2 or 3 group members each month then everyone should be able to receive money at least twice a year. That makes the sharing of expenses less painful for each of you and everyone can look forward to receiving money within a few months.
Discuss the Procedure for Managing Money Carefully
Before anyone starts putting money into the pool, be absolutely certain everyone understands the rules and agrees to abide by them. This is most important because you’ll be able to avoid a lot of heartache when everyone is on the same page.
You don’t have to give anyone any money right away. In fact, you could all just deposit your contributions into a joint savings account, allow it to collect a little interest, and then divide everything at the end of the year.
There are many ways to handle the money. You and your friends need to agree on what you need the money for, how much you can afford to put back, and when it will be disbursed to group members.
Social saving clubs are not about making a profit. This is one of the most important points everyone should understand. Like insurance, a social savings club isn’t supposed to make you rich. It’s just supposed to help everyone absorb unexpected or overwhelming expenses. But while I use insurance as a figurative comparison, by no means should you consider replacing your insurance coverage with a social savings club. That would be foolish. Your homeowners or renters policy, for example, may provide up to $1 million in liability insurance. You’re just not going to get that kind of protection from a social savings club.
Social saving clubs are meant to help members. Honestly, if you know you’re going to have a large expense in 8 months and you’re not sure you can save enough money by then, joining a social savings club may be just the thing. Unlike putting money away in an envelope or a wallet, you cannot (easily) dip into a social savings club’s pool of cash and take unauthorized loans. If the group only shares money once a month, without using a bank account, there is nothing to tempt anyone. You show up to the meeting with your contribution and the pooled cash is then disbursed according to the rules.
Now, friends can be helpful to each other and trade slots. But you must carefully document when these swaps occur. It’s not fair if someone who has already received money for the year “swaps” with someone who has not yet received their payment. If they have private debts to resolve, those affairs should be handled outside the club meetings.
Do not gamble with social savings club money. Until your friends hand you the cash and say “do with it as you please”, that money is not yours to invest, gamble with, or risk in any way.
By the same token, don’t gamify the club experience. In other words, write a schedule out that shows exactly who is given money and when. Don’t draw lots or play cards or otherwise use random chance to decide who gets the money. That is gambling and it will almost certainly be illegal even if you do it in the privacy of someone’s home.
If it’s your turn to receive the monthly pool, you can go blow it all on drinks and slot games the next day. That’s YOUR money, but don’t fall into the trap of playing for money with your friends. That’s a gambling group, not a social savings club.
Final Thoughts
You know, I’ve found a lot of ways to borrow money through the years. I like the social savings club concept because it really doesn’t obligate anyone beyond what they can afford to save each month. The hardest part of being in a social savings club is ensuring that everyone meets their obligation. The next most difficult part of the process is waiting for your turn to come up.
But when you can plan on receiving a lump sum of cash in a certain month, that makes managing your finances so much easier. You’re taking some of the guesswork out of your household budget. I believe that’s a great way to save money, even if you don’t earn any interest on it.