Intro: Are municipal bonds a good investment?
Are municipal bonds a good investment? Are treasury bonds a good investment? Are savings bonds a good investment? Do I invest my money into one of them, a combination of them, or all three?
If you have ever immersed yourself in the personal finance space, one perennial hot topic is investments. You have heard the stories about people whose riches exploded beyond their wildest dreams after following a certain strategy, and you’ve heard horror stories of people who lost everything. With so many conflicting perspectives, who do you turn to?
The truth is that investments can be beneficial or detrimental to your bottom line. When you break it down, it all depends on a number of factors that are within and out of your control:
- How much money you put into a particular investment
- The direction of the market trends for a certain investment
- Your timing with respect to when you begin the investment
- The moment at which you choose to withdraw from the investment, should you choose to do so
- The return on investment that you receive from staying with a given option for a determined period of time
If you choose to buy savings bonds, buy municipal bonds, or even go for treasury bonds, you need to keep all of the factors listed above into account. It also helps to go through them in your head when you read about the successes and failures of others. By reading stories with this newfound perspective, you’ll have a deeper understanding of why someone was successful or not.
At the end of the day, no website can tell you which of these three investments are best for you. Everybody’s situation is different, and so each person will need an individualized strategy that works best for them and their circumstances. If you find yourself struggling to make a decision, see a professional investment advisor to get a qualified second opinion.
All three investments will be discussed in this article to provide an overview of what they are, the pros of investing in them right now, the cons of doing so, and an overall conclusion on their efficacy at present. Once again, please remember that the decision is ultimately yours.
Should You Buy Municipal Bonds Now?
Image Source: Savings Bond
To put it simply, a municipal bond can be defined as a debt security issued by a local government and/or its associated agencies. The issuers include a wide variety of governmental entities that include public school districts, redevelopment agencies, airports that are publicly owned, and more. These bonds act as instruments that allow for the financing of the city’s infrastructure toward projects such as hospitals, homes, and road construction.
As a potential buyer, you should know that the issuers of municipal bonds not only owe its holders—the people who invest money into them—a debt, but they are usually required to pay them at an annual interest rate. This means that if you invest in a municipal bond with a certain amount of money, you will receive a percentage of interest that gets added to your initial investment.
As promising as it sounds, it is important to look at both sides of any investment that you make.
Let’s examine some of the highlights and the failings of municipal bonds in the 21st century:
Pros (+)
- Municipal bonds are exempt from federal taxes, and in some cases you may even be exempt from state taxes and local taxes.
- Building on the above point, you can have your money compound over time and add up to a respectable investment if you are patient enough to hold it consistently over a long period of time.
- Freedom from the ever-changing direction of the stock market shields you from having to worry about the future of your hard-earned investment.
- Its low point of entry allows you to start investing small without the fear of wondering if you made the right choice.
Cons (-)
- The conservative nature of municipal bonds ends up being their biggest downfall. Due to their slow rate of growth, they will not keep up with inflation and the rate of return from high-risk investments, such as well-picked stocks in the stock market.
- Don’t make the mistake of assuming that a municipal bond is 100% risk-free; there is still the small possibility of bankruptcy for a given bond.
- Depending on your financial situation, municipal bonds may not be an option that gives you a good return on investment. If you are in a lower income bracket, the advantage you get from the tax exemptions will pale in comparison to someone who is in a higher income bracket.
Based on the information above, are municipal bonds a good investment? Take into account your financial goals and your income bracket. As previously mentioned, being in a lower income bracket means that you will not benefit significantly from this investment.
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Should You Buy Savings Bonds Now?
A savings bond can be defined as a bond that is sold by the federal government to the public for purchase. Unlike other investments, where you can choose the amount that you put into them, these can only be bought at fixed increments, and there is a cap on the amount that you can purchase in a calendar year.
Like a municipal bond, they accumulate interest over time, but this is done on a monthly basis. The interest is not paid out until the bond has matured or is fully redeemed. Thanks to the fact that the federal government issues these out under their own name, they are the safest investment option available on the market. In the unlikely event that the integrity of your bond is compromised, you can always redeem it at some point since it is registered in the federal government’s database.
Savings bonds share some common beneficial and detrimental characteristics with municipal bonds, as you can see in the list of pros and cons below:
Pros (+)
- Like municipal bonds, savings bonds are exempt from local taxes and state/provincial taxes. There is a federal tax, but it is only applied once it matures or you fully redeem the bond.
- Savings bonds come with a guaranteed minimum interest rate, so you will not have to worry about major fluctuations in the amount of money that is added on to your investment.
- Thanks to the security provided by the federal government, savings bonds are a much safer option than municipal bonds when it comes to a long-term investment.
- To build on the above point, savings bonds are also immune to the stock market’s volatility. In other words, savings bonds are your best option for keeping a fixed amount of cash “locked” for a rainy day in the future.
Cons (-)
- It can take a very long time for the bond to mature, meaning that the rate of return on a savings bond is rather slow. It is unlikely that you will see the same rates of interest that are in a municipal bond.
- If you choose to redeem your savings bond, you have to make sure that it is done AFTER your interest is posted, and not too soon afterwards. Otherwise, you will lose out on the interest payment. Some people have lost 6 to 12 months’ worth of interest because of this one mistake!
- If you try to redeem the savings bond too early, you will pay penalty fees for doing so. If you choose a savings bond, you want to be absolutely certain that you will be keeping your money there for the long haul.
Just like with municipal bonds, you will not see the same return on investment that you could potentially receive with a more volatile option such as the stock market.
Are savings bonds good investments after all? Are savings bonds STILL a good investment despite their shortcomings? If you choose to buy savings bonds, remember that they are a conservative investment. It is certainly not for everybody, and you must be willing to accept potential losses from the lower interest rates that you will be receiving.
However, if you are looking to protect a substantial portion of your money until a later time when it is needed, savings bonds are your safest bet for ensuring that the money will still be there years later.
Are Treasury Bonds a Good Investment Nowadays?
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Last but certainly not least, we have treasury bonds as another viable investment option. Treasury bonds are a federal government-issued debt security with an interest rate that changes depending on the market. Unlike a municipal bond, the investments go toward funding the national debt of the country. Twice a year, the interest rates will be set for these bonds.
Where savings bonds start at $25 and can go as high as $5000, treasury bonds start at $100 and go all the way to $5 million. Instead of being purchased by the general public, they are made available through auctions that are held throughout the year.
However, it is important to note that the maturity date of these bonds is no less than 10 years, which results in higher interest rates being paid out. This compensates for the frequent price fluctuations that these long-term bonds experience compared to short-term bonds.
Before one grabs all their free cash and decides to investment in a treasury bond, it is important to consider the pros and cons of this investment:
Pros (+)
- Just like savings bonds, treasury bonds are also exempt from any state taxes or local taxes. However, federal taxes still have to be paid on an annual basis.
- If you decide that you do not want to keep these bonds, they can be sold to buyers on the secondary market.
- This investment is still low-risk in nature due to its backing from the federal government, which can increase taxes and borrow from other sources if needed.
Cons (-)
- The returns on the money invested are low, as investors need to be willing to keep the money locked for decades. Thirty years seems to be the magic number for a treasury bond to fully mature, and you are sacrificing the higher gains you could potentially get from the stock market.
- Treasury bonds are only sold four times a year, so the chances to acquire them through auction are rare. If you miss these times, you have to buy them on the secondary market. This requires the aid of a broker that is paid commission, which means you lose out on the original value of the bond.
- The value of a treasury bond is subject to fluctuation depending on the changing interest rates, and inflation will have a noticeable effect on this as well. With higher inflation rates comes the loss of an investor’s purchasing power.
Are treasury bonds a good investment based on the findings above? You would have to play the waiting game for a longer time than with municipal bonds and savings bonds to reap the full benefits, but for the risk-averse who have time on their side, treasury bonds can be a solid piece of an investment portfolio.
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Which Investment Should I Get?
It is now up to you to decide if you want to get any of the bonds described in this article, or a combination thereof. As you can see, not every investment will be right depending on income bracket and the financial goals. Diversity exists within each of these bonds, so some choices will be better than others for getting a good return on investment; it’s worthwhile to consider it and weigh your options carefully.
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