More on savings pools

What is reciprocity?

Let's look at an example. Say a member has a credit card debt of $2000. The pool lends the member $2000 to pay it off without having to pay any ongoing fees or interest. In return for using the pool's money, the member arranges with the pool a payment plan to repay the $2000 borrowed, plus an extra $2000 of savings that will stay in the pool for the same length of time that the member is using the pool's money.

By borrowing $2000 interest-free, the member creates in turn the opportunity for others to borrow $2000 interest-free. This is reciprocity. If a member builds up a savings before borrowing from the pool, then the member's reciprocal savings requirement will be less over the term of the loan.

How do pools account for reciprocity?

Most pools use a simple points system to account for reciprocity.

Each month, the pool prepares a statement that shows each members' savings and loan balance. Points are credited to any member who has a positive balance (savings). Points are debited from any member who has a negative balance (loans). In effect, points measure a member's dollar balance over time.

Example

Let's look at a simple example involving four pool members:

  • Jennifer, who has savings in the pool.
  • Mark, who has a loan from the pool.
  • Noel, who has money in the pool ($1000), but who still has a negative points balance from a past loan. Those negative points mean she has not yet completed her reciprocity agreement and, until she does so, she's committed to letting others borrow her current $1000 in savings.
  • Tamati, who is in the opposite situation from Noel. He has a loan from the group, and he needs to repay the money. He's saved with the pool in the past, however, and he still has a positive reciprocity points balance.

Here's their portion of the pool spreadsheet for this month.

Name Savings or loan balance at month end Points (reciprocity) added at month end Points balance from last month Total points at month end
Jennifer $ 500 500 2,000 2,500
Mark $ -3,200 -3,200 -6,000 -9,200
Noel $ 1,000 1,000 -4,500 -3,500
Tamati $ -500 -500 2,000 1,500

Let's look at how the situation changes over the next couple of months.

  • Jennifer withdraws $300. This is her money, and she's welcome to make a withdrawal for any reason, so long as the pool has enough money in the bank account.
  • Mark repays $2000.
  • Noel deposits $1000 as agreed in her loan reciprocity and repayment plan.
  • Tamati pays off his loan.

This leads to the following month-end points accounting.

Name NZD (savings or loan) balance at month end Points (reciprocity) added at month end Points balance from last month Total points at month end
Jennifer $ 200 200 2500 2700
Mark $ -1,200 -1,200 -9,200 -10,400
Noel $ 2,000 2,000 -3,500 -1,500
Tamati $ 0 0 1,500 1,500

Notice that even though Jennifer made a withdrawal, she still has savings, and her points are still going up. Tamati has a zero dollar balance, but he has a positive points credit, and he's in a good position to ask for another loan if he wants one.

Mark has paid back $2000, but his points are still going down, and, at face value, it seems like it will take him a long time to pay his points back. Notice, however, what has happened to Noel's points. She put in $1000, bringing her positive balance up to $2,000, and she's been credited 2000 points as a result. Points are compounding, both when they're negative and positive, so they go up and down very quickly.

Let's look at one more month. For simplicity, let's repeat last month's withdrawals and deposits exactly, with the exception that Jennifer, who now only has $200 in savings, requires a loan agreement before she takes a full $300 out of the pool. Assuming the pool agrees to Jennifer's loan, the four pool members we're following have the following month-end balances.

Name NZD (savings or loan) balance at month end Points (reciprocity) added at month end Points balance from last month Total points at month end
Jennifer $ -100 -100 2700 2600
Mark $ 800 800 -10,400 -9,600
Noel $ 3,000 3,000 -1,500 1,500
Tamati $ 500 500 1,500 2,000

Note that Noel now has a positive points balance, and her loan has been repaid in full, both in dollars and in reciprocity points. If Noel wanted, she could withdraw her full $3000 (so long as it hasn't been loaned out to another member of the group). Note also that Mark has tipped the scale to positive dollars and positive points. His large negative points balance will start decreasing exponentially as he continues with his $2000 monthly repayment plan.

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