Purchasing bonds is one of the safest ways to create a viable nest egg for the future. While the returns on bonds are rarely equal to the possible returns on investments in stock options, bonds are much less likely to go through a period of volatility that results in a loss for the investor. By employing a few simple steps, it is possible to structure your bond purchases in a manner that will allow you to incrementally increase your net worth and provide a comfortable degree of financial security.
Evaluate your current financial circumstances. How much money can you reasonably afford to invest in the bond issues? Keep in mind that bonds take anywhere from a year to ten years to mature in many cases. Only use money that is not needed to pay other financial obligations or meet the recurring needs associated with the household budget.
Decide how you want to make use of the funds available for investment. Bond issues begin as low as $1,000.00 in American dollars. You may prefer to invest in a number of smaller bonds rather than one or two larger bond issues. This is especially true if you want to diversify your bond holdings as much as possible.
Identify sources of information about where to find bond issues that are currently available for purchase. Unlike the stock market, there is not a single source that you can use to find this type of information. A good place to begin is with your local banker or broker. Both resources will know how to tap into information sources that will provide you with accurate and timely information.
Determine the types of bonds you wish to investigate. Bonds are issued by corporations and by different municipalities. One kind of bond does not necessarily pay a higher return that another kind. Your choices may be based on the name recognition of the company offering the bonds, or your appreciation for the project that a city or county intends to fund with the proceeds generated from the sale of the bonds. In all cases, make sure you will get a decent return on the investment.
Consider how the pay out for the bond issue is structured. Some bonds provide periodic payments of accrued interest throughout the life of the bond. Others repay the principle plus the accrued interest once the bond matures. This will give you some idea of when you can expect to pay taxes on any returns you earn from the investment.
Investigate the background of the issuer of the bonds that attract your attention. You want to make sure the company issuing the bond is financially stable and is likely to remain that way until the bond reaches maturity. If a municipality issues the bond, find out what you can about past bond issues that were executed by the city or town. Verify that the bond plus interest was repaid to investors in a timely manner. Past performance is a good indicator of how well the current bond issue will progress.
Execute the purchase order for the bond or bonds of your choice. You cannot do this on your own in most cases. However, you can go through your bank or an investment broker to complete the transaction. Be aware that transaction fees may be applicable. Your banker can calculate the fees before the transaction takes place so there are no surprises at the time of purchase.
Stagger the maturation dates of your bonds. This is particularly important if the bonds do not pay out any interest until maturity. By making sure you do not have several bonds maturing in one fiscal period, you are less likely to find yourself moved into a higher tax bracket and owing more taxes on your return. In other words, you get to keep more of the interest earned if you do not receive a huge amount in one tax period.