I’ve Paid For This Twice Already…

Frugal living and debt reduction tips for a better financial future. This is one family’s story.

January 15th, 2014

Bonds Cut Both Ways

Bad news: The government is up to its ears in debt.

Good news: The government is up to its ears in debt!

While it may seem strange to get excited about your government’s overspending, it actually can be a boon to investors. Many people don’t understand the basics of government debt. A government doesn’t simply overdraw its bank account, nor does it sell itself to the Chinese as some pundits claim.

When a government needs money, it issues bonds. Those bonds are famous for many purposes, particularly war efforts and for a huge array of construction projects. So when you hear that a government is bonding a project, it is creating an investment opportunity.

And many people don’t even realize that they are buying government bonds. Savings bonds aren’t just long-term savings accounts. They are borrowing tools of the government.

So bonds are all around us, and we have many opportunities to buy them. As a result, if you use good bond investment tips to make educated choices, you can take advantage of the government’s expenditures.

It’s actually parallel to borrowing by individuals. If you need something and don’t have the cash for it, you can pay with a credit card. Of course, the big difference in your borrowing and the government’s borrowing is interest rates.

Your credit card is going to charge you a whole lot more interest than the government will pay on its bonds. That’s why consumer debt is bad.

The government is essentially the rooster in charge of the hen house: It sets the interest rates that it will pay to those from whom it’s borrowing money.

Try that with your mortgage.

So although you’ll never get a very high rate of return on a government bond, they are a good investment for several reasons. First, they are secure. If you want to escape the volatility of a stock market, with a 12% gain one year and a 12% loss the next, you can safely ensconce your money in bonds. You won’t make tons of money, but you will not lose any.

Second, they are readily available. A little time online and you can purchase bonds for yourself, or even give them as a gift. Bond purchases are also simple. You make the transaction and you can access your bonds electronically at any time. Upon their maturity, you can redeem them for cash.

Finally, there’s a positive social cost with bonds. You’re not day-trading somebody out of their retirement funds. And you’re doing something positive to help your community. The money you invest in municipal bonds might be financing a school, bridge, or government facility that will benefit you. And you’re helping make it happen.

Somebody makes money on every type of debt. If you buy bonds, you’re the lender. You have taken over the bank’s role, and you get the privilege of receiving money in return for letting someone else use your money for a little while.

Bonds hold appeal to investors because they are secure, simple, and socially beneficial.

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