Personal Finance Friday - Family Endowments
This was a post I did a while ago, and as we look forward to our annual trip with my wife's side of the family I thought this would be a good time to post this again...
Here is a concept not often talked about, group savings, or because of the industry I work in I like to call them "Family endowments". I've always liked the idea because I think people are capable of doing much more when they work together.
So the idea here is that if you have a group of people (it doesn't have to be family) with some particular goal, you form a group and start saving and investing towards that goal. I think there are a ton of things this can be applied to like: a family college fund, a family elder care fund, a party fund, charity fund, scholarship, etc. To give you a practical real life example, my in-laws and Andrea and I decided about 12 years ago that we'd love to have a cabin in Big Bear someday. So we started small and opened a checking account under both of our names and started saving $100 a month. Over the years we have increased and decreased that amount, once we had a certain level of cash we moved some into investments and have continued to grow the fund. After we started to get close to enough for a down payment we looked into the economics of buying a cabin and figured out that it was iffy at best from a financial perspective. So we decided, why not use this family fund/endowment to start paying for the rental of our Cabin every year from the income we make and what we save. It became our vacation endowment (an endowment is a pool of assets that supports an activity with its income perpetually, or forever). Each year we sit down, set a budget, and then plan our vacation, using the funds from "The Cabin Fund" as we call it. We try to spend less than the income and savings so the fund keeps growing, and eventually we may buy a cabin, that is far in the future, but we are making progress!
Some positive aspects of a project like this... It forces accountability between everyone in the group. Everyone knows if everyone has put in the necessary money. Everyone knows the budget and why the budget is what it is. This accountability and the shared enthusiasm for a goal usually means a higher savings rate. What are the chances that the funds would have been saved and not just spent if we didn't have the fund? If you're perfectly responsible with your money, maybe there is no difference but that is not true for everyone. I find that as we discuss the investments for the fund, the discussion of what and why helps in us making overall better decisions. At this point we have not had any disaster investments (keeping my fingers crossed) and some pretty good ones. It also becomes a center for communication in the family, it kind of forces additional discussion about more meaningful items like what we all want for each other in the future. And finally probably the best benefit from my perspective is that I don't feel bad spending the money. It is part of the "Fund" and it doesn't come directly out of my pocket in my head, so I'm less of a penny pincher, and don't get upset if things aren't perfectly fair on any one perspective.
So there are lots of good things we have experienced from this, and there is certainly more we'd like to do with it, and other ideas we have for other mutual goals in the future with family and friends but this can also go horribly wrong if you aren't careful.
Things to do to help ensure success -
Only do this with people you trust. Money can bring out the scary in people. If you've know a person to be a little shady with money in the past, stay far, far away no matter how much you think they'd never do anything to you.
The goals should be clear and discussed often
Someone needs to meticulously account for everything so it's transparent to everyone
People need to be able to have an equitable exit. In our case, I literally track it like a partnership. Each of us know exactly how much we have and if need be we could liquidate it and feel comfortable nothing was unfairly done.
If the money becomes large enough, you may in fact want to make it into a partnership or some other legal form (technically any thing that operates like a partnership is a partnership under the law). But that's a great problem to have because that means you have lots of money saved!
Be sure that you have multiple signers required on accounts
Make sure someone in your group has a reasonable knowledge of investments and risk. If you don't, ask someone to help you so all your hard work doesn't go out the window due to a poor decision.
I'm sure I'll post on this again, because its something I think people should be doing a lot more of. In a world where nothing is for sure (and it never has been), people helping and working with each other lowers risk, increases your chance for success, and if done correctly helps maintain and deepen relationships.
If you have any ideas you want to start with family and friends and want advice on anything let me know!