You Asked: Alternatives to CDs
Dear Foundation,
Our church has several CDs maturing this year. We usually use a small portion of these funds to balance the budget, but we plan to reinvest most of the money. We’d rather invest it with the Foundation than continue to buy CDs. What are our options?
Lots of churches use CDs for low-risk investments, but this strategy requires someone to reinvest the money on an ongoing basis as the CDs mature. We often hear from congregations who are looking for a simpler way to manage these funds after a beloved trustee or finance team member retires from this volunteer role. So you’re definitely not alone! The choice you make will depend on your goals for this money. I’ll outline three possible approaches, and then your finance team can do some discernment together.
Option 1: treat it all as a “rainy day” fund
If your goal is to preserve the value of these investments and keep them highly liquid in case of an emergency, then you should consider our Stable Value portfolio. It contains a mixture of laddered CDs and secured loans made to other United Methodist churches in the Northwest. The laddered CDs do a good job keeping up with inflation and protecting against interest rate drops, while the loans provide modest income. Withdrawals can be made at any time, and it usually takes less than a week for your church to get a check in the mail. Last year, the Stable Value portfolio returned 2.69% net of fees.
Option 2: keep enough of the money liquid to cover the budget for several years, and invest the rest for growth
How much of this money have you been using to balance the budget in recent years? How many years of this income do you need to be assured of? Put enough money to balance the budget for several years in the Stable Value portfolio. That way it will stay liquid and you won’t have to worry about fluctuations in its value. Then, take the rest of the money and invest it for growth in one of our diversified portfolios. These portfolios contain a mix of socially responsible equities and fixed income instruments. The most popular, which is Diversified Moderate, has returned an average of 7.28% per year net of fees for the past ten years. Money in our diversified portfolios is liquid, but subject to market fluctuations.
Option 3: invest the entire amount for growth
When your church invests in a diversified portfolio, you get to choose whether to reinvest the fund’s earnings, or take a regular distribution of part or all of the earnings. Would an annual distribution of 4% meet your church’s need to balance the budget? If so, we could set up such a distribution, and the rest of the earnings could be reinvested, allowing the fund to grow over time. Equity funds in the diversified portfolios expose your investment to higher risk along with the potential for higher returns, so you need to know that in this scenario, there’s no guarantee. I’d encourage your finance committee to take an inventory of all of your church’s assets. How many are exposed to market fluctuations? Which could be liquidated in case of emergency? If the stock market performed poorly one year and your distribution from this account wasn’t enough to balance the budget, what other funds could you tap into?
Obviously, the specifics will depend on the amount of money you’re looking to invest, and the amount of money you expect to withdraw annually in order to balance your budget. Give me a call at 800-488-4179 and we can run the numbers. One of our staff would be happy to join your finance team at their next meeting in order to answer questions.
“You Asked” columns are based on real questions from real churches in our area. Got a question you’d like to see us answer? Email staff@faith.foundation.