Investing funds entrusted to the church is probably not something church leaders think about often, because just the thought of engaging in such practices might seem unnecessarily risky. Such use of church funds can also sometimes feel contrary to what would be considered good stewardship, however; think about the parable of the talents (Matthew 25:14-30).
While there is always some risk with any investment, there are a couple of investment options that have extremely low to almost no risk, and provide an income stream, that over time can grow significantly depending on the amount invested. When considering investment of church funds, it might be helpful to look at the endeavor from the perspective of a household budget. Banks and other institutions offer relatively safe investment opportunities that can help a family grow their savings, resulting in their money working for them. It is no different for a church, if it is approached with wisdom, discernment and common sense.
The first question church leaders must answer is, where will the funds come from that a church desires to invest? To have any significant growth opportunity, investments must have the time to work to generate the income desired. The second question that must be asked is, will the church need access to the invested funds at some point in the immediate or not so distant future, and if so, when? Perhaps the funds will come from the church’s cash reserves, which makes the most sense, since these funds usually just sit in a bank account, with no intended purpose other than to be used for a rainy day or in times of financial difficulty.
It would not be wise however to invest the entirety of the reserve funds, but only a portion of them, leaving a reasonable amount in the account just in case a need arises, and so that the church would not need to access invested funds, which could result in a penalty being assessed, but more on this later.
One of the more common, well known and safest investment instruments is the Certificate of Deposit (CD). In essence, CD’s are a type of savings account that pay a predetermined rate of interest for a predetermined period of time (the term) on a specific amount of money. At least in the current interest rate environment, CD’s are paying a higher rate of interest than conventional savings accounts. When a CD is purchased the buyer is agreeing to abide by the provisions of the CD contract, which includes not withdrawing any of the funds before the CD matures (the term). Withdrawing funds from a CD before it matures will usually result in the imposition of a financial penalty, which could significantly negate the amount of interest paid on the CD. That is why the second question above is so important, if the funds are not available for the entire duration of the CD term, then a church should probably not purchase a CD.
There are various types of CD’s, in terms of interest rate and other factors, so it is imperative that a person understands what they are purchasing, and all of the nuances of each option. Your financial institution can help navigate church leaders through all of the technicalities of each type of CD.
The fixed rate CD is probably the soundest instrument in terms of knowing exactly how much the CD will yield in interest, because the rate will not change during the period of time the CD is in force. There are also variable rate CD’s, which means the interest rate paid on the deposited principal changes, based on underlying market conditions. The interest rate can either go higher or lower, and therefore, is not as predictable as the fixed rate CD. There are other types of CD’s as well, mostly related to the amount of funds invested, such as Jumbo CD’s (minimum deposits of $50k – $100k depending on the institution that sometimes offer a higher interest rate), no-penalty CD’s (more liquidity, but a lower interest rate) and CD’s that allow you to add funds into an existing CD (increasing the principal and face value of the CD, resulting in a larger amount of funds that interest is earned on).
Some other factors that should be taken into account when considering CD’s includes understanding the difference between the CD interest rate and the CD annual percentage yield. The interest is the percentage rate advertised, which is the simple interest rate earned on the amount of money deposited into the CD account. The annual percentage yield represents the effective annual rate of return, which is the interest rate, as well as the amount of compounded interest – basically the amount of interest paid on the interest earned – (the frequency of compounding varies, and could be daily, monthly or annually, depending on the terms of the contract) during the term of the CD.
One potential way to optimize availability of funds, while still investing those funds, is through the use of what is referred to as CD laddering. This is simply purchasing several CD’s at the same time, with different terms, so that they all mature at different points along a specific time line, such as a year. With a little strategic planning, using this approach could create a situation where a CD matures every couple of months or so, and thus freeing up funds penalty free in the event a church needed access to those funds.
Again, the potential financial needs of the church, both intermediate and long term, must be well mapped out, so that the investment strategy is in line with those potential needs, and does not place the church in a situation where a penalty may be assessed in the event funds are needed, which again, potentially negates any growth of the invested amount of funds.
Over the course of the last few years Certificates of Deposit have offered some favorable interest rates, and have generally been a good solid investment. However, the unpredictability of rates of interest during the past year or so have made it a little more difficult for financial institutions to offer longer term, higher interest rates on CD’s. Currently, shorter term CD’s (5-6 months) seem to have the higher rates of interest.
There are also some other fairly safe options to leverage funds to generate additional income in a cash reserve or other type of account, without some of the time restrictions of other investment vehicles such as Certificates of Deposit (CD). One of those investment vehicles is a simple money market savings account. Church leaders will want to ensure they understand all of the requirements of such a fund, such as maintaining minimum balances and the number of withdrawals allowed annually. Some of these accounts are also linked to a checking account, which may have their own minimum balance and other requirements.
It is interesting to note that many banks “pay” checking account owners each month for maintaining fairly significant amounts of money in their account. And while it might appear on paper that an account is bearing interest each month, what is actually happening is the bank is awarding credits to the account owner, which are then used by the bank to offset fees and service charges assessed to the account. At the end of the month, if the credits are more than the account fees, these credits are wiped away, so no actual additional accumulation of funds results in the account. This is the reason why it is so important to understand the accounts a bank offers, and what fees, service charges and interest might be offered in the account.
Many banks offer a checking account that sets minimum account balance requirements, and then “sweeps” any money in excess of that amount into an attached money market account. The caution here is to make sure that the minimum balance amount is realistic and in line with the monthly operating fund needs of the church. If properly set up, and managed, excess funds not immediately needed or used in the checking account can be seamlessly generating real interest in the money market account.
Although not an actual investment on the part of the church, there are church members who desire to donate investment securities (stocks and bonds) to their church, so it makes sense for the church to position itself in order to facilitate a smooth transfer process.
For the donor of securities, they still receive a charitable contribution deduction, but there are also capital gains tax advantages as well, so these types of donations are not uncommon. One of the best ways for the church to position itself to receive these types of investments, is to open a brokerage account with a reputable broker, so that a transfer of shares of investment securities is accomplished brokerage to brokerage, which oftentimes streamlines the process. There are IRS rules requiring a church to provide written documentation of the donated security, so be sure to understand the requirements of these rules in the event that the church receives donated shares of securities.
While there are exceptions, best practice in handling these types of investments would be to immediately sell the securities, rather than allowing the shares to remain in the market. The inclination might be to keep the shares in the market to see if they will grow in value, but the flipside of that action would be that the shares could reduce in value. Which brings up the fact that the trading of investment securities is an advanced investment activity, requiring a thorough understanding of the markets involved and should not be attempted without the knowledge, experience and skill required of such investing. There are also firms that can provide investment advice and guidance – some faith based – but these usually involve the assessment of fees and/or percentages of the invested funds.
Simple Investments like CD’s or money market accounts can result in significant increases to the income of the church, especially over time. The key to success is for the church leader to go into the investment endeavor with eyes wide open, knowing well the financial circumstances of the church and understanding all of the underlying requirements and rules of the investment vehicle(s).
