Making a Positive Impact and Investing in Your Community

Community Investing + How to Pay it Forward

By

Matt Lyons

on

Jan 21, 2021

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Community investing (CI) is defined as a subcategory of being socially responsible while investing. CI puts investment dollars towards things to benefit the community such as affordable housing, job opportunities, education, and child care. Investing in various community activities, programs, and organizations will allow you to enhance the economic health of the community as a whole and amplify the positive impact it has on you, your neighbors, local businesses, and more.

How to Give Back & Invest in Your Community

It’s important to invest and give back to our community to ensure that it continues to flourish and grow. Get out there in the community and take a look at what some of the leaders are saying, talk to others who might share some of your concerns, and promote healthy change. When it comes to investing your money, there are a couple ways to pursue some strategies for your community. 

Community Development Banks

Instead of choosing a traditional banking option for your checking and savings accounts, consider keeping your money at a community development bank. These banks will lend money to those who otherwise couldn’t get a loan. Community banks are FDIC insured like regular banks, but focus on serving more of a low to moderate income clientele. Check out the Community Development Financial Institutions Fund website to learn more about the various banks dedicating services to low income communities.

Agency Bonds

Investing in agency bonds is another way to participate in community investing. Government agencies like Ginnie Mae and government sponsored enterprises like Fannie Mae and Freddie Mac issue agency bonds and help provide housing to those who can’t afford it. Government sponsored enterprises (GSEs) are not government bonds however, so they are not backed in complete trust by the U.S. government.

Agency and GSE bonds are also prone to some inflation and call risk. A call risk refers to the payment the bondholder will receive on the value of the bond, which can typically lead to them reinvesting with a lower interest rate. 

  • Call risk is the risk that a callable bond will be “called.” The risk relates to a bond being called before maturity. 
  • The issuer has the right to call the bond before maturity through different call options. 
  • Call risk is similar to reinvestment risk. Reinvestment risk occurs where the investor risks having to reinvest at a lower interest rate. 

 Social Impact Bonds

A social impact bond (SIB) allows the government to pay for programs in order to achieve an intended outcome, also known as “pay for success” financing. SIBs allow investors to provide funding upfront to help the government achieve a goal.

Overall process of a SIB includes:

  • The government sets up a social program with a goal to benefit the local population. These goals include boosting job growth, alleviating homelessness, making health care more accessible to vulnerable communities and reducing prison recidivism in a city, county, or state.
  • The government invites an external organization to help carry out the SIB project.
  • The external organization gains funding from investors through trusts, foundations, mutual funds, Community Development Financial Institutions (CDFIs) and high-net worth individuals. Some major investment banks will also underwrite SIBs.
  • The organization will enter into agreement with a third-party service provider to help them turn their goal into reality. All shareholders sign a contract that guarantees they will receive their money back with interest if the goal is met. 
  • If the goal is reached, the government will release the funds to the external organization. The external organization will then use the money to pay back the investors.

Other Common Ways You Can Invest in Your Community

If the options are available to you, a great way to help the economic state of a community is to buy real estate in those with more poverty. This will help to provide affordable housing for the low-income tenants and to revitalize some of the neighborhoods that have been neglected. Other investment options can include:

  • Invest directly in community development loan funds.
  • Invest in socially responsible mutual funds with a focus in community investment.
  • Invest directly in municipal bonds in underserved communities to help fund infrastructure, educational facilities, as well as public goods and services.
  • Buy stock in publicly traded companies that invest in underserved communities. This is a less direct way of community investing, but it can allow for investors seeking higher returns rather than those from fixed-income community investments.

Pros & Cons of Community Investing

If everything goes according to plan, community investing can be a huge reward to all of those involved. You're creating wealth for yourself from the return on your investment, and you're also creating wealth for others by improving their economic opportunities! When you witness the lives around you being positively impacted by a successful community plan, that is the ultimate personal reward.

With the many benefits and rewards of community investing, come some hardships and drawbacks. With community investment, you’re usually investing in people and businesses that traditional lenders think are too risky to lend to. Community investing is also a bit more complex than traditional investing. You have to take a look at the big picture and determine whether or not the investment is meeting the standards of your community. Community investment also restricts the amount of options you have, and many of these investments come with low returns like the savings accounts and government bonds.

What to Remember about Community Investment 

Providing support to those around you in your neighborhoods can make a difference, even through the most simple community impacts. Follow some of these tips mentioned to give back in your community and make a difference where you can!

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