Personal finance isn't just about building up net worth—it's also about making money available when you need it.  Just like a business, you have to worry about your balance sheet and your cashflow statement.  Having a lot of money locked up in investments isn't helpful when you need cash to cover expenses today.

This is the logic behind the emergency fund—hold a couple months' expenses in fairly liquid form, like a savings account or US Treasury I Bonds, to smooth over unexpected changes in expenses and income.  Establishing an emergency fund should be your first act before considering any other kind of investing.

How much money should you keep in an accessible place?  To make that decision, you have to balance two opposing forces: the risk and cost of having too little, and the cost of not investing in something with a better return.

1. If your emergency fund falls short, borrowing money even for a short time can be very expensive.  Just watch John Oliver's bit on predatory lending to see how bad payday loan interest rates can be:
   
   
   
   As discussed in this video and a LOT of other media (1,2,3), payday loans frequently drag the working poor into a vicious cycle of high-interest borrowing.  To combat this, ideally your emergency fund would be as large as possible.
   
   
2. The liquid assets in an emergency fund have generally poor returns compared to other investments.  You lose out on the gains you could have made elsewhere, and this is the opportunity cost you pay for that liquidity.  To combat this, ideally your emergency fund would be as small as possible.

So there is the tradeoff: a small emergency fund is inexpensive to maintain but may often fall short; a large emergency fund is expensive to maintain, and no emergency fund is big enough to cover ALL possible emergencies.

Emergencies are, by definition, rare events.  So why don't we get a couple people together to pool their resources?  Congratulations, you've just invented...

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Accumulated Savings and Credit Associations (ASCAs)

In developing countries, villagers often band together to form accumulated savings and credit associations (ASCAs).  A typical arrangement might look like this:

• Each member contributes as much as they want to the pool
• Members can take loans from the pool
• A member's withdrawal limit may be set by the amount and duration of their contributions
• Loan duration and interest rates are set democratically by the group

It's very important to note that while a well-run ASCA can help its members deal with temporary liquidity issues, this arrangement will NOT fix a broken balance sheet or long-term cashflow issues. All members should be 'good for the money' in the decided-upon loan duration!

If you have a small group of friends and family, all you need to set up your own ASCA is a trustworthy treasurer, a spreadsheet, and the ability to quickly and easily exchange money.  And time!  Time to debate with them and agree upon a set of rules.  Will the interest rate be zero?  Should the loan duration be two weeks or six months?  Can anyone withdraw as much as they want, or is the withdrawal limit dependent on how much they've contributed?  What do you do if a member can't or won't pay back a loan?

My ideal ASCA agreement looks something like this:

1. No interest on loans.
2. A loan duration of two months.  Liquidity issues should be fixable by next paycheck.
3. Non-paying members are ejected and socially ostracized. Family and close friends only!
4. Withdrawal limits according to a formula like this:
• the time value of the contributions, times some multiplier
• a withdrawal limit cap proportional to contributions times some multiplier
5. New members are sponsored by two existing members, who each agree to take on 1/3 of the new member's liability in the event of default; the group absorbs the other 1/3

Downsides: you have to trust every group member implicitly, as there is no treasurer overseeing every transfer (maybe PayPal has a setting for requiringan administrative sign-off on transfers, but I haven't yet found it).  You have to deal with PayPal, which has a long history of arbitrarily freezing accounts and generally screwing people over.

 → Credit Unions

Credit unions are like banks, except they're staffed by reasonable people who don't necessarily want to screw you.  You may be able to open a bank account for your merry band of ASCA participants and issue debit cards to allow them to draw on the funds.

I called my lifelong bank, Penn State Federal Credit Union, and they were very helpful in helping me how to figure out what I would need to do.  In short: I'd need to register the ASCA as an 'unincorporated association' with the state to receive a DBA (Doing Business As) name, then register this DBA with the IRS to obtain a Tax Identification Number (TIN).  The IRS TIN process is entirely online and takes all of five seconds, but I suspect the state registration is going to require filing some sort of organizational charter, a list of officers, etc.  With a basic business credit account, the money won't earn any interest and there's no need to also file for IRS 501(c) nonprofit status.  If you're up for a challenge and you do want that tax-free credit union interest, perhaps look into organizing under 501(c)(8) as a "Fraternal Beneficiary Society or Association".  I'll look into this when I have more time (which, at the rate I'm adding projects, may be when I'm retired...)

Downsides: most credit unions have membership requirements.  At Penn State Federal it appears that all members issued a debit card would need to be members of the credit union, and would therefore need to meet those requirements.  Some credit unions may be more open than others, so your mileage may vary.

If you have any experience in this or ideas for other ways of implementing a DIY ASCA, I'd love to hear about it!

My research notes on this topic are available on the Social Saving and Borrowing page on the AHS Wiki.
Puddle recently redesigned their interface and fees to make it simpler for financially unsophisticated users to get started, but I think this limits the appeal to power users like myself.  What is Puddle's long-term plan?  Could Puddle disappear tomorrow and take all of your money?  Not likely with industry veterans and Google Ventures backing, but the lack of powerful management tools has motivated me to explore the DIY alternatives described in the previous section.  The DIY options have serious drawbacks, so maybe actions speak louder than words: for now, we're sticking with Puddle!

If someone from the Puddle team would like to comment on any of this, I'd love their perspective!

Puddle in the News

Forbes - Creating A Line Of Credit With Friends: The New Trend In Finance
Collectively.org - This DIY Lending Company Trying To Disrupt The Broken Credit Industry

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ASCAs Have Promise

Much has been written about how, when you're poor, you're always one step away from financial disaster:
With the right implementation, ASCAs could help people in the US as much as they've helped people in developing countries.  Will Puddle be the implementation that succeeds?  We'll have to wait and see!