Dumb with Money

Because we all have been dumb with our money

Bonds

The beauty of bonds are that they are fixed income tools. You agree on an interest rate and a general length of time prior to purchasing a bond. These are just like Cds, but if you purchase them from the federal government there is the added bonus of a state and local tax deduction.

You can purchase a number of bond types.

  1. Federal Bonds- The instruments they sell are free of state and local taxes. Your money is guaranteed by the federal government. Internationally this is seen as the safest investment on the planet.
  2. Corporate Bonds- This is when companies sell debt to the public through a stock like mechanism. There is no deduction here, but the rate is usually better than the Fed can offer.
  3. State and Local Government Bonds- They offer a competitive rate, just like corporate bonds. The main reason is that they can in fact go bankrupt.

Because of the risk, I have never really been too much in the corporate or local bonds. I did own a few at one time, just to see what it was all about. I have to be honest, they were very close, in terms of growth, to the Fed bonds I owned at the time. With that in mind, I would much rather have guaranteed money for just 1/16% less of a rate.

I usually concentrate on Federal bonds for 3 real reasons that matter to me:

  1. I can deduct the profits from my local and state taxes.
  2. I don’t have to report the income until I cash in the bond. Cds suck that way.
  3. There is no safer investment.

I purchase all of my bonds through my TreasuryDirect account. Here are some tid bits on bonds I routinely purchase:

I Bonds-

  1. They are sold at face value. A $100 bond costs you $100.
  2. They are interest for 30 years.
  3. You have to own them for a minimum 1 year.
  4. If you hold them from 1-5 years only; you must forfeit 3 months of interest.
  5. Growth is not subject to local or state taxes.
  6. The interest rate is determined by 2 parts:

Fixed Rate Component + Inflation Component

Fixed Rate component- This is a percentage rate that is fixed at the time you purchase the bond. It will never change. You add this percentage to inflation component, that is set every 6 months (November and April) to determine your rate.

Inflation component-  This varies based on how the economy is doing.  It is set every 6 months.  After about five months, you have a general idea about what it is going to look like. This is the gambling part of rate.   Usually when this component is high, the fixed rate is lower.

I Bond Buying Tip-

When deciding wheter to purchase I bonds, I never look at the total rate percentage offered at the time.  That is bad indicator of how this bond is going to do for you mid-long term.   I usually watch for a low inflation component, to make it more attractive, they up the fixed rate.  That is the time to buy.

If the I bond fixed components are 2.5% or greater, I put all of my Mid-term money into I bonds.  I have three I bonds I bought a few years back when the fixed rate was 3%, inflation at that point was 0.15%.  For about 18 months, when the inflation component came back up, I was getting over 9%.   9% thats up there with a solid stock.