e m p o w e r i n g pa r t n e r s
WHY THE BIG INTEREST IN
INTEREST? F or the kingdom of heaven is like a man traveling to a far country, who called his own servants and delivered his goods to them. And to one he gave five talents, to another two, and to another one, to each according to his own ability; and immediately he went on a journey. Then he who had received the five talents went and traded with them, and made another five talents. And likewise he who had received two gained two more also. But he who had received one went and dug in the ground, and hid his lord’s money. . . . But his lord answered and said to him, . . . ‘So you ought to have deposited my money with the bankers, and at my coming I would have received back my own with interest’” (Matt. 25:14-26). This parable captures the essence of stewardship: profitable and faithful management of the talents and resources entrusted to us. From reading the Bible, it is clear that the lending of money for interest was a common practice in ancient times. The Bible provides several lessons on the subject of interest. We are expected to manage resources wisely (invest with an eye to generating interest, avoid collecting unfair interest from the poor and needy, and avoid paying unnecessary interest by avoiding debt). Last quarter’s article focused on getting out of debt using 1 Kings as an object lesson. Debt and interest are highly interconnected topics. This quarter we will share some basic concepts that will help boost your financial literacy in regard to
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April – June 2021
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J E N I P H E R C H I TAT E
interest. We agree that “ in the current economic environment of low interest rates and low growth, . . . it is important that everybody has the knowledge, skills, and attitudes to improve their financial outcomes and well-being.”¹ ASSESSING FINANCIAL LITERACY As an entry point to the subject, it would be appropriate to lead church members in an assessment of their basic financial literacy. It has been established that financial literacy has a direct bearing on an individual’s financial well-being.² According to Stolper and Walter,³ there are three questions widely accepted as the “Big Three” indicators of financial literacy. Below, we present two of these questions, which can be used as a self-assessment: 1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money in there to grow? The answer is: l More than $102. l Exactly $102. l Less than $102. l Do not know.
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy: l more than, l exactly the same as, or l l ess than you could buy today with the money in this account? l Do not know.⁴ We have chosen these two questions because, according to Stolper and Walter,⁵ individuals who cannot answer both these questions are likely to make suboptimal financial decisions. If you feel you fail the test, please read on! This article will help boost your knowledge of interest. According to data from a survey conducted by the OECD International Network on Financial Education, many people do not have sound knowledge of interest and struggle applying basic interestrate concepts when making financial decisions.⁶ The survey results are significant as they represent findings of data collected from 30 countries encompassing “Africa, Asia, Europe, Australasia, North America and South America.”⁷ A USEFUL GLOSSARY The meaning of several expressions related to interest in both specialized and promotional documentions are not clear for many individuals. As a result, important elements are overlooked, resulting in poor decisions. WHAT IS INTEREST? Basically, interest represents the cost of borrowing money; to a lender it represents income generated by lending money. Interest has many facets, and we will uncover some of these. FIXED VERSUS VARIABLE INTEREST Interest rates can be fixed or variable. A fixed rate is fixed over the term of the loan or investment. A mortgage with a 5% fixed rate over a five-year term,
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