Written by Gary Foreman
With this column, we introduce Gary Foreman as our columnist on life and financial stewardship. Gary is an associate pastor and former financial planner who founded the TheDollarStretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. We welcome Gary to the P&B team of contributors.
We're all familiar with God's natural law that you reap what you sow in a multiple of what you sow. Paul declares this when he writes, “Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously” (2 Cor. 9:6 NIV).
There's a high likelihood that most of us have applied the law of sowing and reaping to moral situations in our teaching and counseling. We've taught that we reap the same thing sowed, but in a greater amount. And when bad behaviors or sin are sown, the harvest is likewise larger, but hurtful.
However, the principle of sowing and reaping is broader than the ethical realm, it also applies to personal finances. Yes, it's true. If you sow (save/invest) for the future, in most instances, you’ll be rewarded. Likewise, if you sow debt, it too will grow.
In economics it's called “compound interest.” Understanding how it works is a major step towards achieving sound financial stewardship.
What is compound interest? It's the money earned today on the money that was earned yesterday. For example, suppose you saved $100 in 2018 and earned 5% interest on it during 2019. At the end of 2019 your money grew to $105. In 2020 you earned 5% on the $105, which increased your balance to $110.25. This year you earn interest on both the original principal plus the interest from the other years. That's compound interest.
The passage of time and higher interest rates positively impact the compound interest effect. The longer money is invested and higher the interest rate, the greater the effect compound interest will have.
Why is compound interest important? Because it adds to the original principal. Whether it's your savings or your debt. People who are in debt tend to accumulate more debt. People who save tend to see their money grow.
So how can you make compound interest work for you? Begin by clearing up any debt. When you owe money every payment you make is split. Part goes toward the interest owed. The rest goes to reducing principal. So every extra dollar you pay today reduces next month's interest. That makes next month's payment more effective!
Once you're out of debt, save a little every month (Proverbs 6:6-8). Even if it's only $50 or $100 a month, savings add up quickly. Invest your savings where they will earn some interest for you. It's best to start when you're young and time is on your side, but even if you're in your late 50s or 60s, you're not exempt from the need to contribute to savings.
It’s a good idea to keep close tabs on the condition of your flock (in this case savings and investments, including retirement accounts). Just a small increase in the rate of return can make a big difference in how much you'll have in future years. The idea is to earn as much as possible while minimizing risk to principal.
Make an effort each month to add to an account that will earn some interest for you. Sowing and reaping work whether you plant a lot or a little. The same is true for compound interest. Again, even a little bit adds up over time.
Here's an example of how you might do this. I start each day with coffee. I bet many of you do, too. Now I also know that many stop daily at Starbucks, Dunkin' Donuts, Panera Bread, or McDonalds for their daily dose of caffeine. McDonalds might be a bit cheaper, but generally you're looking at between $2 or $2.50 for that morning wake-me-up.
Suppose you changed your habit and made it at home. I haven't worked out how many cups you get out of a pound of coffee, but for the sake of discussion let’s assume you can make a cup of coffee for 50 cents at home.
A savings of $2 could be easily overlooked. But it can add up over time. If you question this, ask yourself why there's a coffee shop on every other corner of our communities. They must be convinced those $2.50 coffees add up.
If you did this daily, put it away and earned 5% on the savings, you'd have over $1,535 in just 2 years! That money could be used to pay off credit card debt. The average credit card interest rate in 2020 was 20.23%. That $2 a day you didn’t spend would reduce your balance by nearly $1,800!
So whether we’re young or old, rich or poor, the Lord's laws apply to all of us. It’s up to us to plant good seed and reap a wonderful harvest!
Gary Foreman is an assistant pastor, author, former financial planner, and founder of TheDollarStretcher.com. If you have questions or suggestions for columns, send them to us at firstname.lastname@example.org.
Editor’s Note: For Nazarene ministers, the 403(b) Retirement Savings Plan offers an effective way for church employees to invest* for the future with tax advantages. Money set aside through payroll deferral or employer contributions is not federally taxed, and when a minister begins to withdraw funds in retirement, they may be received as tax-free housing allowance, subject to IRS guidelines.
*Note: Investing involves risk, including the risk of loss.