There are five basic things you can do with money. 1) You can earn it, 2) live on it, 3) give some away, 4) owe it to someone (or a business or government) and 5) you can grow it for the future.
The run-up in inflation that we’ve seen over the past year-and-a-half makes it clear that finding ways to grow your money is essential. If you put money in the bank and earn a 1% or 2% annual return while inflation is running at 7% or 8% annually, you’re falling behind— way behind.
Inflation means that the money you put in the bank will have significantly less purchasing power when you take it out than when you put it in. That’s why it’s so important to increase the growth rate of your money, to try to keep up with, or in the best possible case, to outpace inflation.
There are many options to do that, but each calls for investing your money in some way. The safest approach right now would be to invest in government I-bonds. The “I” stands for inflation. These bonds, guaranteed by the U-S government, are designed to keep pace with inflation.
Unfortunately, I bonds carry restrictions, such as a $10,000 per-person limit on how much you can invest each year. Further, you can’t hold I bonds in a retirement account such as an IRA or a company-sponsored 401(k) plan.
For most people, investing in the stock market is the easiest way to do this. That scares some people. After all, stocks can go down as well as up, but to get your money to grow requires you to take some risk.
The good news is that you can minimize the risk of investing in stocks if you spread your money across many companies and stay invested for a long time. Being broadly invested and staying the course over a long time are two key ways of reducing risk.
The easiest way to broadly invest is to hold mutual funds that contain shares of many companies. Some funds hold the stock of hundreds of companies and those funds have tended to do quite well over time.
Of course, no one knows the future. This year has been a tough one for the market so far. Next year could be terrific, or it could be worse. We don’t know. But history tells us that those who invest broadly and steadily over a long time almost always come out ahead.
This “compounding” growth is what helps keep you up with— or outpace inflation. The effect of compounding, given enough time, is remarkable. It can turn relatively modest investments of thousands of dollars a year into millions over a few decades. That’s why compound interest is often called the “8th Wonder of the World.”
This is not without danger, however. Investing can foster bad things in your life, such as greed when the investment markets are performing well and fear when they’re not. As a Christian investor, you need to be on your guard. Don’t let greed and fear take over. Instead, seek to be a wise and faithful steward who takes a reasonable amount of risk to prepare for future needs.
It’s possible to take excessive risk with your investments. Proverbs 13:11 warns, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” It’s also possible to take too little risk, which likely will result in you not being financially prepared for your later years.
As a steward of what belongs to God, it’s your role to find the right balance as you seek to put your money to work and make it grow.
You can also listen to the related podcast on this topic.