The first step to becoming an investor is earning interest on your money. It may sound trivial, but most people don’t arrive at this achievement.
I wrote an entire series on the benefits of earning interest from multiple sources such as high-yield savings accounts, certificates of deposit, Series “I” Savings Bonds, and Treasury Bonds.
Today, I want to go back to your first choices towards building generational wealth and living your dream life. Let’s talk about certificates of deposit (CDs) and bonds.
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Why is earning interest so important? The world moves at the speed of light, so you must keep up. The cost of goods and services rises yearly—we call this inflation.
If you are not preparing for inflation, you are falling behind. Every year you must consider ways to combat inflation to preserve capital and protect your family.
One of the best ways to beat inflation is to earn compound interest. Compounding interest is known as the eighth wonder of the world.
Compounding interest simply states that your money earns money. Instead of you going to work to earn $5, your CDs and bonds can do it for you.
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The bigger your principle, the more significant amount of compound interest you will accumulate. Investing in CDs and bonds won’t make you rich, but they are essential in your overall portfolio.
Why CDs and Bonds? We all need to jump into the stock market, business, and real estate to make returns that beat inflation.
However, we also need to keep an emergency fund of 6-12 months of expenses to protect us from market downturns.
We don’t necessarily want our emergency sitting in a standard savings account earning nothing—we can do better.
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We can earn an excellent yield on certificates of deposit and bonds (around 5% today). Although this interest rate isn’t higher than inflation, it is much better than earning 0.01% inside a standard savings account.
Certificates of deposit and bonds work to grow your wealth and protect your resources. But which option is best for your needs?
Choosing the right (safe) investments. You can get certificates of deposit from most banks. You should shop around for the best rates; you don’t need to be a bank member to initiate a CD.
You lock your money into an account when you order a CD. The bank will tell you the timeframe that they will hold your money.
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In return, you will receive monthly interest deposits on your cash. My friend receives $200 monthly from his $100,000 certificate of deposit—not bad for doing nothing.
The Federal Deposit Insurance Company (FDIC) also ensures your money inside a CD. This gives you another layer of protection against bank runs, recessions, and market downturns.
Why Bonds? Bonds come in many shapes and sizes, so you can pick what’s right for you. You can even buy bonds on the stock market.
Buying bonds can be more complicated than buying CDs, but you can lock in rates for much longer.
Buying Series “I” Bonds directly from the US Government on the TreasuryDirect.gov website is an excellent place to start.
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Series “I” Bonds are products that generate interest for 30 years, plus they have inflation protection measures. You can’t go wrong with savings bonds, but they have an annual limit of $10,000.
The interest on Series “I” bonds accumulates and compounds onto itself, preventing you from paying taxes until you redeem them.
US Treasuries for the win. The most straightforward bonds to purchase are US Treasuries. You will get rates similar to CDs but for longer time frames.
For example, you may receive 5% on a one-year CD, but you could get 5% on a five-year Treasury Note.
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The US Government will pay you interest on your treasuries twice a year. The interest payments are exempt from state tax, which helps California and New York residents.
Treasuries do have a major downside if you sell them early. They are marketable securities, so you must buy and sell them on the bond market.
This simply means that your principle amount may be less (or more) if you sell at a certain time. Let’s take a quick example.
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Let’s say you have a $1,000 bond with a 5% coupon rate. If the current interest is 6%, and you sell your bond, you may only receive $900 face value.
You have to understand interest rates to sell your bonds successfully. However, if you never sell, you’ll receive your face value at the end of the holding period.
Bonds on the stock market. If you are looking for income and not protection, you can buy bond funds on the stock market.
Bond funds are the best way for small retail investors (read: us) to purchase corporate and junk bonds. These bonds usually sell to large institutional investors in denominations of at least $1,000.
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There are many bond funds, such as short-term and long-term treasuries, municipals, corporates, and high-yield corporate (junk).
You can pick the duration and risk you like; however, everything on the stock market is subject to emotional trading. If you don’t like seeing your principal decrease, stay away from the stock market.
What is right for you? What is your risk tolerance? What do you want to achieve with your CDs or bonds? Do you need an emergency fund or a safe source of income?
Conclusion. The great part is you can own more than one type of safe security. You can have CDs, Series “I” Bonds, and Treasuries.
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In fact, I have everything except for CDs. I love buying long-term bonds from the US Government.
You can’t go wrong if you hold these securities until maturity. There is a risk if you sell Treasuries early, so be aware of those scenarios.
Ultimately, you are well on your way to investing for interest and dividends. Inflation waits for no one, as it is the cost of being alive.
You can either cry about inflation or take drastic measures to beat it. You will eventually get the upper hand when you take action. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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