Most of us want to get the most out of our money. Whether that means upgrading our lifestyle, taking a luxurious vacation, or investing in a new car, or saving for retirement. If you’re new to investing, it can be tough to know where to begin. There are too many options and the long-term numbers can be very overwhelming.
Making smart decisions with your money today is a great way to secure your financial future. If you want to save money for the long term, you can’t just let your money sit in your bank account. It’s important to invest as early as possible so that you can earn compound interest.
Whether or not you should invest in bonds depends on your investment goals.
What Is Investing?
To invest is to put money into an asset with the hope that the asset will create income or increase in value.
Just consider real estate, as an example. If you intend to rent out a house you purchase, it will be an asset that generates income. If you purchase a house intending to renovate it and sell it at a higher price, that is an asset whose value has increased.
The same goes for investing in shares. A share is simply a small piece of a company. If the company pays dividends to shareholders, this is a way of them investing money back into the company. If you want to, you can sell your shares for more money than you bought them for, if the company’s stock price has gone up in value.
There is a lot of leeway when it comes to what you can invest your money in. Some of the options include stocks, bonds, cryptocurrency, real estate, and more.
Putting your money into investments rather than holding it in cash will make your money work harder for you.
Why Should You Invest Money?
Why should someone invest? The simple answer is to build your wealth.
We all have noticed that prices change over time. For example, milk cost 5p in the old days, but now it is more expensive to eat out or travel. Inflation is the gradual increase in the price of goods and services.
Depleting cash values is a challenge associated with holding money in a bank account. If you had $100 fifty years ago, you could have purchased a much larger quantity of goods and services than you could today. If prices continue to go up, $100 won’t buy as much in 50 years as it does now.
The main advantage of investing is that you can usually earn a higher return than the rate of inflation. This means that your money should hopefully keep up with, or even exceed, the rising cost of living.
The interest rates offered by banks are relatively low, so it may be a better idea to invest money in something that has the potential to earn a higher return. This way, the value of your investment will increase over time.
What Are Bonds?
Governments, municipalities, and corporations issue bonds as a way to raise money for various projects and ongoing expenses. This means that when one of these organizations needs money, they will create a bond. It’s important to note that these governments and companies are not borrowing money from banks or other traditional lenders.
Instead of loaning money from a bank, issuing a bond allows them to tap into investor capital. An investor will “purchase” a bond when it is issued. The money used to buy the bond will act as a loan for the respective company/government. This system allows each party to get the money they need while also allowing investors to earn interest on the bonds they own. In their simplest form, bonds are ultimately glorified IOUs.
Governments, municipalities, and corporations will issue bonds for a specific amount, otherwise known as the par value. The investor buys the bond at its face value and agrees to receive the same amount back from the entity at a predetermined time (the maturity date). After a specified period of time has passed, the investor can expect to receive their initial investment back, plus any interest that has accrued (known as the coupon rate).
What Kinds Of Bonds Can You Invest In?
Bonds are a financial tool that allow entities such as governments, municipalities, and corporations to raise capital. By selling bonds, these entities are effectively selling a debt, with the promise that the money borrowed will be paid back at a later date, usually with interest. That said, not all bonds are created equal. There are several types of bonds, each with its own features, pros, and cons. When choosing a bond, it’s important to consider the issuer’s financial strength and stability, as well as the type of bond. Here’s a list of the bonds investors are most likely to come across, and how they contribute to diversified portfolios in their own unique ways:
Corporate bonds are debt instruments that are issued by corporations. The name of the bond suggests that the corporation is the one who owes the money. Corporate bonds are issued by large corporations to raise money for various projects, such as expanding the business or funding research and development. Bonds that are issued by corporations typically offer higher yields than other types of bonds, but the interest is taxable.
Municipal bonds are typically used to finance public projects undertaken by cities, towns, and states. Municipal bonds, for example, can be used to pay for schools, roads, and hospitals. Municipal bonds have a lower yield than corporate bonds, but the interest is not taxed.
Municipalities issue general obligation bonds to fund projects that will not generate income. An alternative way to pay the bondholder needs to be found by the city, town, or state. When a municipality issues a general obligation bond, it is generally expected that taxes will be raised in order to make the payments on the bond.
Revenue (Municipal bonds): Municipalities across the country issue general obligation bonds to fund projects which generate income. In order to construct a toll road, a municipality would issue a revenue bond to acquire the necessary funding. This means that the money collected from the toll road will be used to pay back the bondholders.
Treasury bonds are issued by the U.S. government. They are also known as T-bonds. Treasury bonds have the least amount of risk because they are backed by the government. This means that although treasury bonds are a very safe investment, you will not earn as much interest on them as you would on a more risky investment.
Savings Bonds: As fixed-income instruments issued by the U.S. The Department of the Treasury uses savings bonds to help finance the government’s borrowing needs. The safest bonds are generally the ones backed by the U.S. government, but the yields are slightly lower than what you would get with other bonds.
Corporate bonds which are below investment-grade are called junk bonds. However, the higher yield associated with junk bonds comes with a higher risk. Junk bonds have a much higher risk of default, but corporations offering them have higher yields to attract investors.
Bond funds are similar to mutual funds in that they pool money from many different investors to invest in bonds. Bond fund managers collect money from investors to invest in a variety of bonds including municipal, corporate, and treasury bonds. By doing this, investors are able to get professional money management and a more diverse portfolio.
How To Start Investing In Bonds For Beginners
While there are many similarities between buying stocks and bonds, there is no connection between where each can be purchased. The starting point for each asset is slightly different. In contrast to stocks, bonds are not traded on a centralized market. Instead of trading on major indices, most types of bonds must be purchased through a broker; the exception is T-bonds, which are purchased directly from the government. If you’re an investor looking for bond-related exchange-traded funds, you can find them on broker and government websites.
Bonds require an initial investment, whereas stocks do not. You can buy bonds for less than $1000, and you can buy multiple bonds to add up to $1000. Here is a brief overview of how you can start investing in bonds:
You can start investing in bonds by buying them through an online broker. You are not buying directly from the company when you purchase from a broker. You are buying from other investors who are looking to sell. For a lower price than the face value of the bond, you can buy the bond from the underwriting investment bank during the initial bond sale.
If you’re looking to buy bonds through an exchange-traded fund, you have a few options. The most common type of ETF buys bonds from multiple companies, and some funds focus on specific types of bonds, such as short-term, medium-term, or long-term bonds. Mutual funds that invest in bonds are ideal for individual investors because you can buy them in increments of less than $1000 and they offer instant diversification.
You can purchase government bonds from the Treasury Direct website. You don’t have to pay a broker’s fee if you buy the stock yourself.
How Much Money Should Beginners Invest?
How much money should you invest when considering investing for beginners?
This depends on three main factors:
- Your financial goals.
- How much you can afford to invest.
- Your risk tolerance.
What are your investment goals?
First, ask yourself: What are your financial goals? Why are you investing? What would you need money for in the future?
Some common goals include:
- Having the money to buy a house or a car.
- Funding your child’s university education.
- Growing a business.
- Having money/generating an income for retirement.
A general rule of thumb is that most people should invest with their retirement in mind. Pensions in Western countries are becoming less appealing due to inflation and the age threshold for accessing the pension is increasing.
Some experts are worried that country’s national debt and aging populations will mean that state pensions will not exist in another 30 years. This is especially important for younger investors to think about for their future.
Even if you have a pension when you retire, it might not be enough to sustain the lifestyle you want. What are your plans for retirement? Do you want to travel or help your children and grandchildren financially? If a comfortable retirement is what you’re after, relying on a pension may not be enough.
With this in mind, it’s important to:
- Clarify your financial goals (including the amount of money it will take to achieve those goals).
- Choose a time frame for achieving those.
You can calculate how much money you need to invest per month or per year to achieve your goal, taking into consideration the expected rate of return and the timeframe you have set.
In many cases, it is easier to reach longer term goals, because of the power of compounding (which was discussed earlier). The power of compounding is when you earn a percent on your investment, and then that percent becomes a part of your principal, so then you earn a percent on that, and so on. This means that either lengthening your investment timeline or increasing your rate of return could lead to the same outcome. Different investors have different goals, and this is what makes investment interesting.
How Much Can You Afford to Invest?
As a starting point, many gurus recommend investing 5% or 10% of your net income. Wouldn’t it be better to invest all of your money if it would help you reach your goals sooner?
It might seem like a good idea to put all of your money into savings, but you actually need some of that money for everyday expenses and things you want. You also need to have money saved up for unexpected costs. It is better to keep your investments and let them grow rather than selling them for extra cash when you need it.
It can be difficult to save 5-10% of your income if you are used to spending a lot of money. A good way to start saving money is to keep track of your spending so that you can see what areas you can cut back on. You’re not alone. If you have subscriptions and memberships that you never use, you’re not alone. If you’re eating out a lot instead of cooking at home, it’s probably costing you a lot of money. Do you find yourself buying things you don’t need, instead of using what you already have?
Change these habits to save money for investments.
Summary
The stock market’s volatility over the past year has been eye-opening. In just a few months, stocks went from a huge drop to new record highs. This has been a very unpredictable year, and bonds may be a good investment for those who are not willing to take risks. Investing in bonds can help protect you from market swings, which may be a good idea until the situation with the Coronavirus becomes more clear.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.
