Group Theory in Action: ISA Millionaires

A more in depth look at how a group of people could come together to top-up one person's ISA allowance and the benefits that that would give to all those involved.

Brief Background

In my previous post about Group Theory I argued for greater collaboration between groups of people and I explained how this would benefit all those involved. Two examples of areas where sharing financial resources would help was getting on the property ladder and using full ISA allowances. I wanted to explain further my thoughts behind how  a group could collaborate to top up an ISA allowance.


Working together for mutual benefits
Wouldn't it be great if in 20-25 years time your family had a large pot of money with which you could withdraw from to put a deposit on a house, pay for a wedding or other celebration or just withdraw an income from. "Impossible!" you might respond, "not on my income!" you might retort, "ridiculous!" you might sneer. These responses are misguided. With a little patience, trust and understanding your family or a group of close friends could have a pot worth over £1,000,000 generating an annual income of 50-70k.

Preliminary Reading

For a quick explanation of how ISAs work and how to become an ISA millionaire read my previous post Become an ISA Millionaire. One of the biggest problems with becoming an ISA millionaire is a person's lack of ability to save. This can be solved with Group Theory as we shall very quickly find out. To fully understand this post, I will be making references to an excel spreadsheet that you can quickly download by clicking on the picture above.

Group Mentality

Instead of trying to save for yourself (and your partner) take a step back and think about a bigger picture.
Find a group of people that you can trust. They could be close family or friends. In my example (spreadsheet) I have six close family members (persons A to F) who have grouped together. At least one of the members of the group is married, for arguments sake we will say that person A is married to someone outside of the group. The group works together to top-up to the maximum person A and his/her partners joint ISA couples allowance, £21,360. To do this each member of the group and their partner each has to produce £3,560 savings per year (if both work then this is only £1,780 each). This works out at £296.67 saved each month per member and their partner (about £148.50 if both work). As you can see the amount a person has to save is substantially reduced.
In my example I have assumed that the family has invested in the stock-market, yielding an annual return of about 7% per year (after inflation). After 22 years the family has built up the pot to well over £1,000,000. Hereafter, the pot of money could be moved into high dividend yielding shares or else part of the capital could be sold each time someone wants to take a out a portion of the money. The idea would be to help future family members (children) to put a deposit on a house or help pay for family weddings. Alternatively each member of the group could withdraw an income of over £10,000 a year depending on the rates of return or else simply build the pot even more until such a time that the members decide to retire and dissolve the pot.


Some of you may be wondering why shouldn't you just continue to save in your own time by yourself? There are several reasons why this may work better:

1. Group motivation - you are encouraged to save more, especially if you have a contractual agreement
2. Save Less, quicker - your monthly savings are a lot lower than had you attempted to build such a pot by yourself. Of course you're not entitled to all of it, but read on.
3. Compounding - the compounding effect is greater as a group especially if you are reinvesting your dividends. You can buy a lot more stocks and shares very early on (more than if you had invested by yourself) releasing a greater compounding effect earlier on.

There is no reason why being in a scheme such as this should prevent you from saving extra money elsewhere and topping up your own ISAs. As for couple A, there could be an agreement built into the contract about extra savings that they make allowing them the usage of other group members excess ISA allowances.
Obviously, for any of this to work there needs to be carefully worded contractual agreements written up by a lawyer. These would include clauses on: amount to be paid each month, who to pay, when and how can people withdraw (how often and how much), what if someone can't pay and finally what if person A wants to invest extra money into ISAs.

Clearly there is much to think about. Would you invest in a group scheme like this? What other problems can you find with this scheme? Can you think of a better and more profitable way to boost your savings by working as a group? All comments welcomed and encouraged.

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Rob said...

I like the idea... I'm seeing it as a bit like Wealth Watchers where you all get together and discuss how well your efforts at saving up money are going. A bit of competitive spirit with congratulations for those who've done well and plenty of shared tips would do wonders. When I come to think of it there's often been occasions when a friend has mentioned a good deal on a certain item that is particularly good value so I don't see why it couldn't work even on a more informal basis.

That said I'm not sure how many would subscribe to physically investing as a group, but I don't think that's the important part... I'd say the important part is the group motivation to save. Just like with Weight Watchers... you want to buy (eat) that rather tempting treat, but you know you shouldn't. A bit of peer pressure would go a long way to making you more likely to resist.

Mr. Moneybanks said...

Thanks for the comment Rob, really appreciated. Loving the term "Wealth Watchers", I may borrow that at some point if that's alright?
You make a good point. Whilst I hadn't created Group Theory to work in such as way as to encourage motivation I had recognised it as an important by-product. However, your comment has given me food for thought. You are correct, the positive spinoffs of group motivation may be even more important than the idea of investing together. That said, why don't you think people would invest together? Is it due to a lack of trust? Is there something fundamentally wrong with my idea? Many Thanks

Rob said...

@ MMB - "That said, why don't you think people would invest together?" - In a way I do invest with others in that we share links, research and suggest new investments for each other and with those I do this with most there is a lot of mutual trust. However, despite having similarish views we only have so much overlap with investments due to personal preference.

For example, I tend not to like investing in oil or open coal mines because I like to think I'm doing more than just making a quick profit. Others might not like investing in tobacco or alcohol. Futher afield there are varying risk appetites... some want safe bonds, while others are happy with stocks. To have an identical approach is highly unusual, but the benefits are rarely for actually physically investing from the same pot... rather from the ideas, opinions, research and of course motivation that is shared.

Mr. Moneybanks said...

I actually agree with many of your points Rob. Of course in practice there would be many difficulties with regards to choosing stocks and shares. A group could compromise on an index tracker, or simply defer to the member of the group with the most experience/ best track record. These sorts of specifics would need to be sorted out well before any legal documents/ contracts were put together.

"there are varying risk appetites... some want safe bonds, while others are happy with stocks. To have an identical approach is highly unusual"

Have you considered the idea that Group Theory would allow you to spread your risk over several people, possibly allowing for a greater mix of different types of investments, allowing for safe and some riskier aspects to the overall portfolio?