The End of Easy Money

In an effort to fight the highest levels of inflation since 1981, (8.5% in March,  8.3% in April and 8.6% in May) the Federal Reserve Bank raised short-term interest rates by the largest amount since 2001.  

There is no getting around the reality that inflation and rising interest rates have altered the financial landscape for everyone. 

It is critical that church and faith-based nonprofit leaders understand the financial impact inflation and rising interest rates are already having on your ability to fund your ministry plans. 

This short blog is an overview of why the financial landscape is changing so quickly and a discussion of three points of concern that you, as a church or faith-based nonprofit leader, need to understand and take action to address. Feel free to share it with others in leadership with you.

The Changing Financial Landscape

Since the Great Recession in 2008, the American economy has enjoyed a season of tremendous growth and prosperity marked by:

  • historically low interest rates and rates of inflation
  • a stock market that has risen 558% - 6,594 in Mar 2009 to 36,799 in Jan 2022
  • a 27% increase in annual philanthropic giving - from under 330 billion to over 450 billion 
  • a consistently strong job market- especially for those fortunate enough to be well-educated. 

What has changed?

The sudden increase in demand for almost every raw material, consumer good, and service resulting from the worldwide pandemic recovery has overwhelmed the availability of raw materials, manufacturing, and delivery systems across the globe. The aging population in the United States (U.S.) is also fueling wage inflation through retirements.  The percentage of the population that is working or actively looking for work continues to shrink from 67% in 2,000 to 63% in 2022. This loss of 6% of the working population coupled with growing demand for labor has driven the national unemployment rate to an extremely low 3.6% and is pushing wages upward. 

Russia's invasion of Ukraine is creating fears of worldwide shortages of oil, gas, and agricultural production. Ukraine and Russia export about 30% of the world’s wheat, 60% of the world’s sunflower oil, and 20% of the world’s corn. Russia is the second-largest gas producer and the third-largest oil producer in the world. 

As demand outstrips supply, prices go up. The rate at which prices increase is called the inflation rate. The U.S. annualized inflation rate was 8.6% in May- a level that has not been seen in over 40 years.  

The Federal Reserve Bank's main inflation-fighting tool is to raise short-term interest rates to cool inflationary pressures by slowing demand for goods and services by raising the cost of borrowing. 

A good example of how higher interest rates reduce demand can be found in a new home purchase. A home buyer that finances their purchase has a fixed monthly amount they are willing and able to spend on a home payment. Each 1% rise in the interest rate on a 30-year mortgage reduces by 9-11% the amount of the home they can purchase and still maintain the same monthly payment. 

Between January and April of this year, the average 30-year home mortgage has jumped from 3% to over 5%, slashing most borrowers' purchasing power by 18-22% in a matter of just a few months. This principle applies to the purchase of vehicles, credit cards, and church debt financing. 

The Federal Reserve Bank has put the world's markets on notice to expect a series of rate hikes in 2022 and beyond. But, because the United States economy is so intertwined with the world's economy, taming inflation is an inexact science that can easily bring about unintended consequences, like a recession. 

In short, the era of cheap money has very likely ended. 

Three Ways Inflation is Already Impacting Your Ministry Funding

1. Rising Costs of Goods and Services for Your Church

The cost of funding ministry is currently increasing by more than 8% annually. From utilities to wages and benefits to maintaining your facility, just doing what you did last year requires more resources.

If the current inflation rate holds, giving to your ministry budget will need to increase by over 8% this year, just to maintain your current level of ministry impact. 

The impact of inflation is further complicated by the fact that with each passing year, churches are losing fundraising ground to our nonprofit friends. Over the last 50 years, the percentage of American giving going to religion has fallen by half and the pace of decline is growing with each year. 

It may surprise you to learn that Americans are giving about the same percentage of their disposable income as in 1980 and that much of the church giving decline is occurring because our most capable donors are shifting more and more of their giving away from the church to non-profits they perceive are doing a better job of changing the world. 

In response, leaders need to identify and put into place a reliable year-round generosity development strategy to grow their ministry by 10% or more in the coming year and to ensure they are taking the appropriate financial management steps to ensure your church or N.P.O. remains on sound financial footing.

Horizons Stewardship’s CEO, Joe Park, is conducting a series of webinars on Avoiding Financial Mistakes with Stan Reiff and others from CapinCrouse, a leading accounting firm, focused on providing expert advice to churches and faith-based nonprofits. It is called the Money and Ministry webinar series and is also available within our free generosity resource library, Giving365

Sign up to participate in or receive a recording of our May 17th webinar- Budgeting, Annual Giving, and Financial Management by clicking on this link.

2. The Rising Cost and Increasing Difficulty in Borrowing

Inflation is doubly difficult for churches with debt because they will experience the squeeze of higher payments due to rising interest rates, while at the same time feeling the squeeze of the higher cost of funding ministry as the prices of everything else also increases.

The historically low interest rates we have enjoyed over the last 15 years led many church leaders to make the decision to borrow money and amortize it (pay it out) over 15, 20, or even 30 years. Unlike home mortgages, church loans largely come due every few years and a new interest rate is negotiated with the lender. Over the past 15 years, interest rate adjustments have generally been good news for churches as leaders announced lower or stable monthly loan payments. Those days are behind us now.

Churches can expect to see the interest rates on their loans increase as lenders demand higher interest rates as compensation for the increased cost of their funds and the decrease in purchasing power of the money they are paid in the future due to inflation.

The other factor that impacts the interest rate on a loan is the perceived risk of default. Not all customers pay the same interest rates on home, auto loans, and credit cards. Those with lower levels of debt and higher credit scores (a measure of repayment ability) pay less than others. The same is true with church loans. Higher monthly debt payments or declining giving increase the church's debt service to income ratio.

To calculate this ratio for your church, divide your annual debt payments by your annual ministry giving and other sources of undesignated income. If your debt service-to-income ratio is 20%, your church spends 20% of every dollar of income on debt payments.

Most churches can manage up to 10% of their ministry funding going toward debt. But when it climbs above this level, ministry funding almost always suffers. 

With each increase in this ratio, the attractiveness of your loan to lenders decreases because of the perception of increased risk. There was a day when a church could borrow money simply because there was equity in their property value, but no longer. Today the primary measure of loan quality is the ability to make payments while having the margin to absorb fluctuations in income and expenses. As debt service consumes a larger portion of income, lenders will require higher interest rates to compensate them for the additional risk. 

If your debt service-to-income ratio is over 10%, the prudent course of action is for leadership to consider its options to reduce or eliminate church debt

A great resource to share with staff and other leaders is a recently recorded a webinar by Horizons and CapinCrouse specifically addressing the prudent use of debt and financing for churches,

3. The Impact of Increasing Ministry Costs on Giving

If the current rate of inflation (8.5% annually) remains stable, your church must grow a year-over-year increase in giving simply to continue with your current level of ministry funding. In the past, too many church leaders choose a "wait-and-see" approach, treating "hoping for the best and avoidance" as if these were reliable strategies. By the time leaders realized they should have taken action to grow giving, they have backed themselves into a corner where they were forced to slash ministry funding. 

A very predictable reaction to cutting ministry funding is for givers to reduce giving and which launches a downward spiral of falling giving and reductions in ministry funding or staffing. 

Once in motion, reversing downward cycles in giving and ministry funding takes both time and the investment of financial resources precisely at the moment they seem to be in the shortest supply.

Horizons has worked with tens of thousands of churches over the last 30 years.  In the majority of cases, when a church in financial crisis engages Horizons to guide them to a solution, the underlying issues were both identifiable and predictable in a season the church had the time and financial resources to avoid the crisis.  We often hear from leaders that they had concerns, but did not voice them for fear of offending someone, looking foolish, or feeling like they should just have more faith. 

For the same reason that people see doctors and dentists for check-ups when they feel fine, I recommend church leadership consider an evaluation of your financial health, including practices that impact giving in your church or faith-based nonprofit. Don't wait until you are in pain to take action.

The April Money and Ministry Webinar was focused on Analytics, Data, and Sustainable Funding. This is a great place to start to understand the steps you can take right now to grow giving, even in difficult times.

Be Proactive

  1. Help other leaders understand the impact inflation and rising interest rates are already having on your ministry. Consider sharing this blog as a starting point. Horizons has a variety of other resources at and in our free on-demand library Giving365.
  2. Agree on a strategy that is proven to provide double-digit increases in annual giving to ensure giving exceeds the annualized inflation rate (8.5% in March,  8.3% in April and 8.6% in May 2022).
  3. Put in place financial management strategies to ensure the church remains on sound financial footing without having to reduce ministry impact. 
  4. If your church has existing debt and/or you need to fund capital improvements such as technology or building upgrades or to launch new ministries, consider the benefits of a capital funding or special giving initiative.

    It may be a surprise to learn that debt elimination efforts are very often successful even when ministry funding is down. Removing debt service from the ministry budget through a capital campaign can provide an instant boost in ministry funding.

    It may also be new information that debt campaigns frequently raise more when coupled with campus upgrades or underwriting the launch of a new ministry. If this is something that could be of interest, take a look at a free church capital campaign resource that will answer many of your questions.

Now is the time to look at your church's financial health in view of the rapidly changing financial landscape. Doing so will allow you to plan and adjust to the rising ministry costs without having to take aggressive cost-cutting measures. In short, it could spur fresh ideas and deliver a new path for a bold future.

You may also like

Tony Morgan on Seven Strategic Shifts Church Leaders Must Make Now
Tony Morgan on Seven Strategic Shifts Church Leaders Must Make Now
18 May, 2020

Seven Practical Shifts Tony Morgan, a nationally recognized author, speaker, consultant, and founder of The Unstuck Grou...

Pastor Spotlight – Q&A with Ron Edmondson on Leading Through COVID-19
Pastor Spotlight – Q&A with Ron Edmondson on Leading Through COVID-19
20 April, 2020

Ron Edmondson is a nationally recognized consultant, speaker, and author on church leadership and revitalization. Joe Pa...

Horizons' Church Giving & Worship Survey - June 2022
Horizons' Church Giving & Worship Survey - June 2022
28 July, 2022

Horizons invited churches of all sizes and denominations to complete a survey identifying changes in their Jan-June 2022...