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This is a guest post from Penny Nickel of Money and Values.
If you’ve ever looked into socially conscious personal finance options, you may be familiar with Socially Responsible Investing (SRI), probably in the form of mutual funds. But did you know that there’s a whole world out there of products like savings accounts and CDs that will allow you to participate in community investing?
When you put your money in a bank to earn interest, the bank is actually turning around and loaning your money out again, to earn enough to pay you plus turn a profit. When you invest in a typical bank, the bank makes investments it thinks are best based solely on financial criteria, and you don’t know where the money is flowing — it could be spent on manufacturing cluster bombs or financing companies that enrich and support the government in Sudan, to name just a few of the unsavory possibilities.
Other financial institutions, on the other hand, use a broader set of criteria — making investment decisions based on a combination of financial and social and/or environmental factors. This doesn’t just mean avoiding negative investments — it allows funding to be targeted to specific causes in order create positive social and environmental impacts. The most common institution is your standard community development bank or credit union (find one here), which helps strengthen poor and financially-underserved local communities through offering fair and affordable mortgages to residents, supporting community members’ small businesses, funding affordable housing, and the like — often as the only resort for individuals with little credit history or collateral. But there are many other options, too, if you know where to look — ways your savings can support making businesses more environmentally friendly, provide microcredit abroad, fund fair trade cooperatives, even support niches like child care or independent media.
There’s a wide range of community development/socially conscious products available, from checking and savings accounts to money market accounts and CDs, at hundreds of financial institutions. In general, the interest rates are considered market rate and are roughly comparable to what you’d find at an average bank– although they’re not always going to match the very top rates available. Here are some of the highest-earning (as of 7/07) and/or most interesting options I’ve found:
Low- or No-Minimum Savings Accounts: This is where you’ll find the biggest gap from a non-socially minded strategy. While there are dozens of community development banks that have savings accounts, you’re looking at 2% or less, usually under 1%. While this compares well to plenty of traditional banks, it’s well shy of the rates you’ll get from online high-yield accounts.
- ShoreBank Pacific: 2.0% APY, $250 minimum ($25 minimum for kids)
- Lends only to businesses and non-profits which are committed to reducing their environmental footprint.
- Compares with: EmigrantDirect, 5.05% APY, no minimum
Money Market Accounts: These accounts require minimum balances, but in return you get higher interest rates, and usually a limited ability to write checks from the account.
- Domini Money Market Account: 4.33% APY, $2500 minimum
- This is where I keep all my non-retirement savings. The money goes both to ShoreBank (a general community development bank) and to ShoreBank Pacific (an environmental bank).
- Self-Help Credit Union: 4.68% APY, $500 minimum
- Compares with: AmTrust Direct Money Market Account, 5.36% APY, $1000 minimum
Certificates of Deposit (CDs): In today’s interest rate climate, you can get rates in a high-yield savings account that match or beat CDs. But while savings and money market accounts have variable rates, CDs lock in interest rates, which helps protect you if rates fall. And while your money is only available at the end of the CD’s term (or with penalties), this may be an advantage for you if you want to make sure emergency fund money is only spent on emergencies.
- Calvert Community Investment Notes: 3.0% APY, 1-10 years (not FDIC insured)
- Can be targeted to support: International/Microcredit; Gulf Coast Recovery; Independent Media; Social Enterprise (revenue-generating businesses that promote social/environmental aims); Affordable Housing; or any of eight regions in the US
- ShoreBank Pacific: 3.8-3.9% APY, 1-5 year CDs, $500 minimum (4.5-4.6% APY with $2500 minimum)
- Equal Exchange: 4.45% APY 3-year CD, $1000 minimum (not FDIC insured)
- This investment helps Equal Exchange support democratically-run fair trade farmer cooperatives of farmers and promote their coffee, tea, and chocolate products.
- Self-Help Credit Union: 5.34% APY for a 1 year CD, 5.24% APY for 3 years, $500 minimum
- Your CD can support the broad community development mission of Self-Help, or you can target it to support child care or environmentally sustainable development.
- Compares with: GMAC 1-3 year CDs, 5.40% APY and $500 minimum (top low-minimum CD at Bankrate)
(These are just a handful of your options; you can search for more here.)
In many cases, you’re looking at about a 1% difference in APY or less — or $10 in yearly interest earnings on every $1,000 you’re putting into savings. Even if you were to give up 5% in interest, which is about as wide a gap as possible right now, that’s only $50 a year sacrificed for every $1,000 invested.
You may decide that the benefits are well worth the cost, flat out. I know that I’m so glad to feel proud and excited rather than worried and guilty about what my savings are doing, that I don’t think much about my “missing” 1%. It’s also a sort of “automatic giving”/”pay charity first” method that makes sure I’m supporting my greater social goals on a monthly basis, which is great since I often struggle to make as many charitable donations as I intend to… mostly due to forgetfulness and procrastination on my part, but if your challenge is that you spend the money before you have the chance to give it away, this could work for you too.
And if you’re really concerned about the hit in interest earnings from switching to a socially conscious bank, and you decide that you’re unwilling to come out behind monetarily, it’s worth asking yourself: How do I feel about cutting $10-$50 a year from my charitable giving budget in exchange for putting $1,000 to work for causes that are important to me? That’s a deeply personal decision, and you’ll have to figure out what feels right to you, but it’s one well worth exploring.
For more information:
- Learn much more about community investing products, institutions, and impacts at The Community Investing Center, including its database of organizations.
- Interested in other forms of socially responsible investing, like mutual funds? Check out my series at Money and Values and/or this tool.
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July 26th, 2007 at 6:55 am
“Even if you were to give up 5% in interest, which is about as wide a gap as possible right now, that’s only $50 a year sacrificed for every $1,000 invested.”
You’re nuts right? That 5% is the difference between keeping pace with inflation vs. stuffing your money in a mattress and letting inflation eat away at it. At least with the money in a mattress I can get it when I need it.
July 26th, 2007 at 7:35 am
Bravo! Great summary of this wise way of thinking about money. For forgoing a small amount of interest, your whole investment is being put to use beneficially, helping improve the world.
Lots of people like the mantra “Be the change you want to be in the world” and socially responsible investing is a great way to do this.
I have a lot of links on this on my blog, too.
July 26th, 2007 at 7:40 am
@Don: but these are short-term “investments” like checking accounts, money-market funds, and CDs. If you’re concerned about beating inflation you wouldn’t be investing your money in those products anyway because they rarely beat inflation in the long run.
When I lived in Vermont, the Vermont National Bank (now TD Banknorth) had a socially responsible/local investment option for money market and savings accounts that paid exactly the same interest as a conventional account…it was a no brainer.
July 26th, 2007 at 7:53 am
This is interesting information, but as Don said, it has nothing to do with getting rich (slowly or otherwise). When considering interest rates, you must always keep inflation in mind.
July 26th, 2007 at 1:18 pm
I’ve been trying to decide if I want to invest in one of those. Money Magazine had a good entry on that a few weeks ago and made a good argument. Jim Cramer, however, broke it down like this. Sin generally beats Angel companies in returns. Casino’s, cig’s, booze, companies almost always do well and post good returns. The socially-conscious companies don’t post as well, however, you can sleep good at night if that means something to you.
July 26th, 2007 at 1:42 pm
I’m confused… Are all these investments bad? I mean it seems like they are roughly as strong as the typical 5% savings accounts I’ve seen. Are these bad then too once inflation is accounted for? What *is* the inflation growth rate?
I made a little spare change this summer, I was hoping to invest it. This article made be a little happy that I could invest it and help others, but I don’t want to do it if it means my investment will suffer to the point where I will lose money from inflation.
July 26th, 2007 at 4:48 pm
@NeoteriX– Historically, inflation is usually somewhere between 2% to 4% a year. In recent years:
2000: 3.38%
2001: 2.83%
2002: 1.59%
2003: 2.27%
2004: 2.68%
2005: 3.39%
2006: 3.24%
(from http://inflationdata.com/inflation/inflation_rate/CurrentInflation.asp)
Regardless, even though it is important to think about inflation, I think some people take the “interest rates must beat inflation rates” principle too seriously. When you get down to it, inflation just means your buying power decreases by X% which is equal to $X (ie 3% which is equal to $30 on every $1000). But you can make up that $30 from any source (like being more frugal, or selling something on eBay), not just from a 3% interest rate on your savings. Or you could lose that $30 to inflation and it’s no different from spending $30 on anything else.
July 27th, 2007 at 12:13 am
Penny Nickel, your logic is a little flawed as the $30 that you are making up isn’t anything extra earned and which is also affected by inflation. you also must take into account that any interest bearing account or appreciating investment is also subject to tax. over time, inflation adds up quickly when you are trying to save for retirement.
I agree with Don, 5% is a huge difference. It isn’t $50 per $1000 difference, because you have to compound every year. in terms of retirement savings in the long run, it becomes quite substantial.
of course this post is about social responsibility. If you feel the need to give, then give. if you feel the need to give up opportunity costs by investing in so called social funds, then do so.
July 27th, 2007 at 4:58 am
I strongly urge my friends to turn their conscience off when saving and investing. Investing is about trying to get the highest returns with the least amount of risk, not about assuaging your conscience. Really, if you don’t buy that tobacco company’s stock, it won’t lower their profits one dollar. It will just lower your returns.
I am investing to get the highest risk-adjusted returns I can, with the goal of becoming completely financially independent. Once I am financially independent, I can give my time and money to whatever cause I choose.
If you want companies to behave responsibly (which I do, actually), make sure you express in the voting booth. Really, which do you think works better - a few thousand people refusing to buy an oil company’s stock because they do nothing to prevent oil spills, or a federal regulator handing that company a bill for $50 million for their last oil spill?
Like it or not, our governments make the real rules we all play by — don’t fault a company for calling the best plays they can within the rules.
July 27th, 2007 at 5:03 am
I’d say that you need the accounts to beat inflation, otherwise you are losing money. 0.5% to 1% difference is not that important, I’d be willing to sacrifice 0.5% based on customer service.
July 27th, 2007 at 5:48 am
As I tried to explain in my previous comment, I think people are missing the point that all the instruments (CDs, savings accounts, money market funds) described here are for short-term investments, where beating inflation is rarely an issue. If you have your retirement savings in CDs and money market accounts, you’re taking a big risk! It’s rare for any savings account, CD, or money market fund to beat inflation over the long term.
For short-term investments like this the inflation rate isn’t relevant.
I think people assume Penny Nickel is talking about long-term investments in socially responsible mutual funds for your retirement account. She’s not. I agree that putting your retirement savings into socially responsible funds puts you at greater risk of having your earnings largely negated by inflation. But that’s not at all what we’re talking about here.
July 27th, 2007 at 6:37 am
Thanks, Brad, you beat me to it. I’m not sure why Don and Tim think this is about retirement savings– are their retirement savings in CDs or money market accounts? That’s where people put short to medium-term savings, which is what I’m talking about here. Inflation and interest compounding over time is a big deal, sure, but these accounts aren’t for money that’s going to be around that long!
Likewise to Jeff, who seems to think this has something to do with not buying stocks, rather than banks lending to create financing for good causes, which I personally believe makes a very concrete difference. Did I do a bad job of explaining it?
(Tim, not sure about the math. $30 affected by inflation is $30.09, and figuring in the tax makes it a smaller difference, $22.52 after 25% tax. You are right that it is a per year number– but so are most people’s budgets, that’s all I meant.)
July 27th, 2007 at 9:31 am
If I can, I prefer my savings accounts to beat inflation - especially if its short to medium term money (I’ll use it in a couple of years time). It doesn’t look as though that’s a particular problem though, you could just use money markets or cds rather than savings accounts.
July 27th, 2007 at 4:42 pm
Idiots… You put your money in an account that offers 2% over an account that offers 5%? That little precent can make a big difference over 5 or more years.
Over 5 years @ 2% you’d have a principal of
1,104.08
verses 5%
1,276.28
You invest/save money to grow it, idiots is all I have to say. Grow big and tall, that’s my $1,000,000 opinion.
Later….
July 28th, 2007 at 4:53 am
Name-calling aside, putting your money in a lower-interest account in order to support local social and environmental investments is only stupid if it’s not a conscious decision and if you don’t understand the opportunity costs. But if you do it fully knowing that you might forego some growth, it’s no different than a donation or a purchase. If a millionaire decides to buy a new Porche instead of a used Toyota, does that make him/her an idiot? I don’t think so, even if I would never waste my own money like that. To a millionaire who likes Porches, buying one wouldn’t feel like a waste. Similarly for someone who cares about social and environnmental issues, foregoing a few hundred or even a few thousand dollars in interest income on some CDs or money market accounts is worth it. Adam’s priority is maximizing growth; Penny Nickel has other priorities. What’s so hard to understand about that?
July 28th, 2007 at 11:49 am
it doesn’t matter if it is short term or long term investments. opportunity costs is what matters. presumably you are investing for a purpose. i mean the title did include “investing” in it if I can read correctly didn’t it? If you invest in something you know to be less yield, it will take you longer to reach the goal for your investment. investing also suggests that you plan to earn something off of it otherwise why are you investing in the first place?
brad, regardless of what priorities Penny Nickel has, PN couched it in terms of it’s only 1% or 5% difference. even in the short and mid-terms, the difference has opportunity costs associated with it, whether it be money towards paying insurance, rent, food, or something else.
if you want to give, then do so. Just don’t try to justify it based off of the principle of wealth accumulation because it simply doesn’t add up.
July 28th, 2007 at 12:42 pm
Tim, the opportunity cost here is the price that Penny Nickel and others are willing to pay in order to be sure the banks are doing “good” things (or at least not doing “bad” things) with her money. If you don’t care what is done by banks with the money you give them, that’s fine, there’s nothing wrong with that attitude. But some people do care, and they are willing to pay (in terms of opportunity cost) for the sense that the bank isn’t using their money to do things they don’t want to support. She’s still earning interest on her investments, just not as much as she would otherwise, and maybe not enough to beat inflation in the long term. It all centers around one’s priorities and one’s willingness to take a hit (in terms of opportunity cost)for the things they believe in. Some people give up their lives for things they believe in; giving up a few percent in interest income is pretty inconsequential in comparison.
July 29th, 2007 at 9:47 am
Tim: I wish I’d titled the article differently. “Community investing” is meant to indicate investing in *communities*. I used it because it’s a commonly-used term for banking options that support low-income communities, but obviously that’s a niche term not everyone is familiar with and I can see how people would interpret it differently. The products are really banking products– savings accounts, money market accounts, CDs– which are there to hold your savings at minimum risk.
Maybe other people do it differently, but I don’t usually have “investment goals” in dollars and cents for my savings. My purpose for investing my savings is to find the best balance between earning interest and supporting the causes that are personally important to me. It is a personal balance. Some people might not be willing to give up any interest to have a social/environmental impact, others would be willing to give up 0.5% or 1%, others 2% or 3% or 5%. It depends on people’s personal priorities, I just wanted folks to know about the options so they could decide if any of them fit with their priorities.
I know that some people feel strongly that making money is one thing, and charitable giving/supporting causes should be entirely separate. But I think there are some good arguments that your impact is stronger if you allow many times more money to be lent out to support your causes than you would by giving directly. If you want to look at it in a making-money sense, you could just decrease your charitable giving by the amount of the opportunity costs you lose, and break even or even come out ahead. So you don’t have to lose any money doing it this way (unless you are not making donations in the first place).
But sometimes getting rich isn’t just about your net worth. I want a rich life and I define that broadly, and part of that is feeling like I’m helping others and making the world a better place. For me that’s part of the whole “get rich slowly” approach, and I thought there might be others here who are hoping to get some of that, too, out of this blog. For those who feel this is out of place, I’m sorry…
(Thanks again, Brad.)
August 1st, 2007 at 9:43 am
Here’s another way of thinking about this. If you can afford to contribute $1.00 to directly supporting something you think is worthwhile, they just get that dollar. If you are willing to invest $100 at a 1% lower interest rate than a conventional bank, you are INVESTING in communities, and allowing them to lend the whole $100, which obviously has 100 times as much impact as a donation of $1. So community investing is a way to maximize one’s positive impact on the world for a minimal sacrifice. I don’t believe in waiting until you’re rich to help others along. I think it is in all of our self-interest.
August 1st, 2007 at 11:36 am
I appreciate the information from Penny Nickel’s post on these opportunities to invest in local communities where often no one is willing to invest. I will probably put $1,000 in a CD & see how it goes and yes, I know I will lose perhaps $40 in a year if I get 1% vs. 5% return. This is my choice & I wish that those of you who don’t want to make this choice would lighten up. Its too bad blogs are often places where people have to unload a lot of nastiness rather than exchange info.
August 5th, 2007 at 2:36 pm
Are there any forms of investment that goes towards young people?
August 16th, 2007 at 11:20 am
I think 1% is easily an acceptable sacrifice. Considering that I already give 10 - 15% of my gross income for various charitable purposes, I would say that an additional 5% sacrifice on investments/savings is intolerable. That doesn’t mean that socially responsible investing is not a good concept, but it has to be done in a well informed manner.
Thanks for the article and the links/resources.
A.J.
http://www.thenewself.com