Now that you know more than you ever wanted to know about inflation, let’s move on to talk just briefly about the other enemy of investing, taxes. Certainly taxes are a Biblical concept. Take a look at the following scripture passages: Ezra 7:21-26, Matt 17:24-27, Luke 20:19-26, and Rom 13:1-7. Jesus even paid taxes He didn’t owe. As managers of God’s money, we are clearly obligated to pay taxes on the earnings from saving and investing. Within this discussion of saving and investing, the two taxes we are concerned about are income taxes and capital gains taxes. Naturally we will PAY ANY TAX DUE. However, there are some kinds of investments that are “tax-free”. That is, the returns from such investments are exempt from federal taxes and in some cases states taxes as well. I will have more to say about these later.
At the heart of saving and investing is a wonderful, amazing concept or phenomenon known as compound interest. It’s the key. It’s a very simple thing. Take a look at the table below.
| Savings Account Earning 6% Interest | |||
| Year | Principal | Interest Earned Annually | Cumulative Ending Balance |
| 1 | $100.00 | $6.00 | $106.00 |
| 2 | $106.00 | $6.36 | $112.36 |
| 3 | $112.36 | $6.74 | $119.10 |
| 4 | $119.10 | $7.15 | $126.25 |
| 5 | $126.25 | $7.57 | $133.82 |
You see what’s going on here in this table. We have initially invested $100 and the first year we earned $6 in interest. If we leave the (now) $106 invested, the second year we earn $6.36. If we add the $6.36 to the principal and leave the (now) $112.36 invested, the third year we earn $6.74. We are reinvesting the earnings each year and the principal is growing (accumulating) at an increasing rate. At the end of the five years, if we leave the earnings to accumulate, our initial $100 will have become $133.82. Now, I know what you are thinking. What’s the big deal, we are making $6-7 a year, I want to be rich.
And besides, 6% consistently is pretty optimistic in today’s environment
Well, let’s say at the age of eight years old you start a paper route, and you rake a few leaves and you mow a few lawns, and you run a few errands, and maybe you work at Burger King an hour or two after school every week (when you reach employable age), etc. and you manage to earn $50 a month. You deposit the $50 every month into your IRA (Individual Retirement Account) and it earns 10% consistently/annually (very optimistic in today’s environment). And let’s say you continue in all your business activities through high school and “retire” at the ripe old age of 18. In all, you have put $6600 into your ROTH IRA over the 10 years. And let’s say you leave this $6600 in your ROTH IRA to compound until you reach age 65 and never add another dollar during the intervening 47 years.
Your sister however did not have a paper route or was not as entrepreneurially inclined as you and waited till she had graduated from college to start her savings. She got a really good job and at age 26 she began putting $2000 a year into her ROTH IRA. She continued to do this for 40 years and also earned 10% annually on her savings. At age 65 who do you suppose had the biggest stash of cash, you, into which you put $6600 or your sister into which she put $80,000?
You’ll be glad to know it was you. Your stash will have grown to $1.1 million, 162 times what you put in as a kid. Your sister will have ended up with a nice stash as well at just under a million dollars. Your earlier start is what made the difference even though with much smaller deposits and for far fewer years thanks to the tremendous power of compound interest. By the time your sister started making her deposits, you were already earning more than $2000 a year.
What is the moral of this story? Start saving some money. Do it now! The sooner the better! As soon as possible! Even small amounts can make a big difference.
After this little story, you may be wondering when, if ever, one might be interested in the concept of SIMPLE interest. That is, the interest earned annually on the original investment (without reinvestment of annual earnings). When you get to be an old person, and unable to be gainfully employed (not retired unless you are a Levite) God will be providing for your needs from the interest you are earning on investment of His money. You may even be using some of the principal He has permitted you to accumulate.
One of the interesting things I learned recently in my studies on the subject of saving and investing is the “Rule of 72”. It comes in handy from time to time in financial deliberations.
72/I = Y
If we divide the number 72 by the rate of interest, the answer we get is the number of years it will take to double our money if invested and left to compound at that rate of interest. Cute isn’t it? For example, 72/5% = 14.4 years. A savings account earning 5% annually will double in 14.4 years.
Next week I’ll summarize the last several weeks and then take up where we left off the following week. There’s a lot more to say about investing God’s money. See you then.
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Rom 13:1-7 Let every person be in subjection to the governing authorities. For there is no authority except from God, and those which exist are established by God. 2 Therefore he who resists authority has opposed the ordinance of God; and they who have opposed will receive condemnation upon themselves. 3 For rulers are not a cause of fear for good behavior, but for evil. Do you want to have no fear of authority? Do what is good, and you will have praise from the same; 4 for it is a minister of God to you for good. But if you do what is evil, be afraid; for it does not bear the sword for nothing; for it is a minister of God, an avenger who brings wrath upon the one who practices evil. 5 Wherefore it is necessary to be in subjection, not only because of wrath, but also for conscience’ sake. 6 For because of this you also pay taxes, for rulers are servants of God, devoting themselves to this very thing. 7 Render to all what is due them: tax to whom tax is due; custom to whom custom; fear to whom fear; honor to whom honor. NASB
Matt 17:24-27 And when they had come to Capernaum, those who collected the two-drachma tax came to Peter, and said, “Does your teacher not pay the two-drachma tax?” 25 He said, “Yes.” And when he came into the house, Jesus spoke to him first, saying, “What do you think, Simon? From whom do the kings of the earth collect customs or poll-tax, from their sons or from strangers?” 26 And upon his saying, “From strangers,” Jesus said to him, “Consequently the sons are exempt. 27 “But, lest we give them offense, go to the sea, and throw in a hook, and take the first fish that comes up; and when you open its mouth, you will find a stater. Take that and give it to them for you and Me.” NASB
Ezra 7:21-26 And I, even I King Artaxerxes, issue a decree to all the treasurers who are in the provinces beyond the River, that whatever Ezra the priest, the scribe of the law of the God of heaven, may require of you, it shall be done diligently, 22 even up to 100 talents of silver, 100 kors of wheat, 100 baths of wine, 100 baths of oil, and salt as needed. 23 Whatever is commanded by the God of heaven, let it be done with zeal for the house of the God of heaven, lest there be wrath against the kingdom of the king and his sons. 24 We also inform you that it is not allowed to impose tax, tribute or toll on any of the priests, Levites, singers, doorkeepers, Nethinim, or servants of this house of God. 25 And you, Ezra, according to the wisdom of your God which is in your hand, appoint magistrates and judges that they may judge all the people who are in the province beyond the River, even all those who know the laws of your God; and you may teach anyone who is ignorant of them. 26 And whoever will not observe the law of your God and the law of the king, let judgment be executed upon him strictly, whether for death or for banishment or for confiscation of goods or for imprisonment.” NASB
Luke 20:19-26 And the scribes and the chief priests tried to lay hands on Him that very hour, and they feared the people; for they understood that He spoke this parable against them. 20 And they watched Him, and sent spies who pretended to be righteous, in order that they might catch Him in some statement, so as to deliver Him up to the rule and the authority of the governor. 21 And they questioned Him, saying, “Teacher, we know that You speak and teach correctly, and You are not partial to any, but teach the way of God in truth. 22 “Is it lawful for us to pay taxes to Caesar, or not?” 23 But He detected their trickery and said to them, 24 “Show Me a denarius. Whose likeness and inscription does it have?” And they said, “Caesar’s.” 25 And He said to them, “Then render to Caesar the things that are Caesar’s, and to God the things that are God’s.” 26 And they were unable to catch Him in a saying in the presence of the people; and marveling at His answer, they became silent. NASB