Saving and investing money is wise. Jesus used the economic principle of investing in His parable of the talents. (See Matthew 25:14-30.) The wise servant put his master’s money to work. It grew. The unwise servant hid the money away—he neither risked losing it nor tried to increase it. We normally expect to earn interest on our capital (the amount of money we have to invest). But interest rates are low. In fact, for some in Europe, interest rates have dropped into the negative.
Negative interest? What does that mean?
In a normal scenario, you might do chores to earn cash. After tithing and paying for necessities, you decide to save a portion in a bank savings account. You expect the bank to accept your money (your “deposit”) and to pay you a tiny bit each month (“interest”) on your funds. How does the bank afford to do it?
Your money doesn’t stay at the bank. The bank uses it (and money from other depositors) to offer loans. The bank charges borrowers interest on the loans—so they pay back a little more than they first borrowed. The interest charged is calculated at a higher rate than the amount the bank pays you. So you earn a little, the bank earns more, and others get funds to make important purchases like homes, cars, or college educations.
Lending is important for a healthy economy. When people have money to spend, their purchases keep others in jobs. When people are working, they are confident to spend too—which keeps the overall economy good. See how the cycle works?
But when the economy gets sluggish—which has happened over much of Europe and Japan for the last decade—people get cautious. They tighten up spending. That’s when interest rates drop. Banks hope the promise of smaller return payments will encourage borrowing and rev up the economy with spending again. But as loan rates drop, banks earn less profit. That means they pay depositors less interest.
If borrowers still won’t borrow, banks like European Central Bank may try slashing interest rates to the negative. That means they pay interest on a loan instead of charging it. But to make up some of the cost of that, the bank stops paying interest on savings accounts. In some cases, banks even start to charge fees to depositors with very large savings (such as businesses or the very wealthy).
Welcome to the upside-down world of negative interest rates. Some economists say it’s necessary for pulling out of a long-term financial slump.
In the short term, it means that average people “must save more, work longer, and expect less,” says Olivia Mitchell. She is an economics professor at the Wharton Business School at the University of Pennsylvania. She instructs her daughters to save 18% of everything they earn.
There is a positive side to the negative rate. Low rates prior to the pandemic helped push stock market investments to record highs. Stocks come with risks for loss, but they also offer a much greater potential for gain. When a business’s profit grows, its stock increases in value. Many investors are people who think savings alone will not produce enough return. They act kind of like the first servant in the parable—not wanting to bury their “talents” in a low-paying bank account. They purchase stocks. Lately, many stockholders have seen very good results in dividends (payments made on business growth)—like that wise servant did!