Archives for June 2019

Optavia Review: A Weight Loss MLM Scam or Legit?

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Budgeting for Wedding: A Guide to Paying for Your Big Day

From the dress to the cake to the reception venue, wedding planning can pull you in dozens of different directions. It can also pull on your purse strings until they’re ready to snap.

According to wedding publisher The Knot, American couples spent an average of $19,000 on their wedding ceremony and reception in 2020. Although that’s a big drop (mostly due to the coronavirus pandemic) from 2019, when the average cost was $28,000, it’s still a hefty price tag. And those figures don’t even include the honeymoon!

Before you have a mini heart attack, keep in mind that the average isn’t the rule. There are many genius ways to save money on your wedding and still have a fabulous celebration.

But before you start browsing tulip arrangements, you need to have an idea of what you can afford overall.

To keep a handle on your spending and strategically tackle all the costs you’ll face, here’s the first item on your wedding to-do list: Set a budget for the big day.

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What to Consider When Framing Your Wedding Budget

Fresh off the high of the proposal, you and your future spouse need to come together to answer some vital questions.

  1. What’s most important to you in regards to your wedding?
  2. How long do you want to wait to get married?
  3. How will you be paying for the wedding?

What Matters Most?

Like choosing a college or buying a house, the decisions you make when planning a wedding aren’t based on cost alone. There is a lot of sentimental decision-making involved.

You’ll want to be able to reflect fondly on your wedding for decades to come. You may already have strong opinions about what you want your big day to look like. Sit down with your fiance to come up with the top three priorities for your wedding.

Is it important to have your ceremony in the church your parents got married in — even if that place is 2,000 miles from where you live? Do you want a band to play all the songs that hold special meaning in your relationship? Is it vital to serve foods that represent both of your cultures?

Establishing what’s worth splurging on will help you create a budget reflective of what you really want your wedding to be like, rather than following a template of what the typical couple spends.

What’s Your Timeline?

A wedding day is marked on a calendar.

The period between saying “yes” and saying “I do” can have a big effect on what you’re able to afford. An 18-month engagement gives you time to save up for a more extravagant affair while you might have to make sacrifices if you have only six months to plan.

According to Brides magazine, the average engagement lasts between 12 and 18 months..

When figuring out when you want to get married, know that the time of year can affect costs too. Wedding season typically lasts from late spring to early fall. You may find vendors are cheaper in off-season months.

You’ll also want to beware of planning a wedding close to holidays when venues may be booked and caterers may be busy. A wedding on New Year’s Eve or Valentine’s Day may seem fun or romantic, but you’ll likely pay a premium for those special dates.

Who’s Paying?

Before you start planning, an important factor to figure out is how you — or someone else — will be paying for your wedding.

Your parents or other close relatives may want to chip in to cover wedding costs, but don’t just assume — or expect — they will. Have a direct conversation with family about the financials. If your folks are contributing, make sure you understand whether they’re providing a set amount or if they plan to cover a certain item — like the wedding gown or the booze for the reception.

If family is contributing financially, make sure you understand their expectations, like inviting a ton of extended relatives or having the wedding in your hometown.

After determining what family will cover, you and your fiance need to hatch out a plan for everything else. Figure out how much existing savings you can throw toward the wedding without eating into vital emergency funds. Determine how much you can realistically put aside every month leading up to the big day.

Take a look at your existing budget — or budgets, if you manage money separately — and figure out where there’s room to cut expenses. (Use this post on how to save money fast as a starting point.)

In addition, start brainstorming ways you can make a little extra cash to plump up your savings. (This post on quick ways to make money has some neat ideas.)

Open a separate savings account so your wedding savings don’t get spent on everyday expenses.

Your savings, plus any family contributions, will make up your wedding budget total. If what you expect to have saved falls short of what you expect to spend (which we’ll discuss next), you have three choices:

  1. Plan a less expensive wedding.
  2. Push back the wedding date to allow more time to save up.
  3. Borrow money for your big day.

You probably won’t come across a financial expert who would recommend taking out a personal loan for a wedding. However, if this is the route you’re taking, look into opening a credit card with a zero interest introductory period. And — this is important — plan to pay it off before that period is over.

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Creating a Budget for Your Big Day

Once you’ve made the important decisions about what you want, when you’ll get hitched and how you’ll afford the wedding, it’s time to lay out a budget.

You can do this on a spreadsheet you make yourself or one available online or through an app — such as WeddingWire’s wedding budget tracker or The Knot’s wedding budget planner.

Your budget should include sections for estimated costs, quotes from vendors and the prices you actually pay. Make note of when initial deposits are made and when final payments are due.

A bridge gets her gown put on her as her mother holds her hand.

Average 2019 Wedding Costs

Information from The Knot indicates how much vendors charged on average in 2019 for their services. These figures will give you an idea of what couples can plan to spend in various budget categories:

  • Invitations: $590
  • Wedding dress: $1,600
  • Hairstylist: $110
  • Makeup artist: $100
  • Florist: $2,000
  • Photographer: $2,400
  • Videographer: $1,800
  • Transportation: $800
  • Reception venue: $10,500
  • Catering: $70 per person
  • Rehearsal Dinner: $1,900
  • Wedding cake: $500
  • Reception band: $3,700
  • Reception DJ: $1,200
  • Wedding favors: $400

And that’s not all — you’ll also need to budget for the following:

  • Ceremony site
  • Officiant
  • Wedding dress accessories
  • Groom’s attire and accessories
  • Bride’s and groom’s wedding bands

You’ll also need to add the cost of the marriage license, which ranges depending on location but generally costs less than $100.

Now think about extras. Do you want to hire an instructor to choreograph your first dance? Do you want sparklers at your send-off? Are you getting special gifts for your bridal party? You’ll need to budget for those.

There’s also all the incidental costs. Do you need to purchase a liquor license to serve alcohol at a nontraditional venue? Did you factor in the cost of stamps for your wedding invitations? Make sure you don’t forget tipping and taxes.

Budgeting for Your Wedding Your Way

What you actually spend may vary drastically depending on where you live, when you’re getting married, the size and style of your wedding and other factors.

Since you’re a Penny Hoarder, we know you can throw a fantastic wedding for much less than $19K.

Contact vendors to get quotes on prices. Sites like WeddingWire, The Knot and Thumbtack can help you find florists, photographers and the rest. Get recommendations from recently married couples in your social circle or chat with brides and grooms from online forums.

Get quotes from multiple vendors. You might be able to get them to match a competitor’s price. And be sure to go over contracts in detail so you know what is and isn’t included.

It’s important to include some cushion in your budget to cover miscellaneous expenses that will pop up. About 45% of couples in The Knot’s wedding survey said they went over their planned budget.

Having a 5-to-10% cushion can help you avoid going over budget, so you can start off your marriage on a financially responsible note.

Nicole Dow is a senior writer at The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

How to Budget Like a Pro in 4 Simple Steps

It may be tempting to go around treating yourself every day without ever thinking about how much money is in your bank account.

But let’s face it — you don’t want to be struggling paycheck-to-paycheck, swimming in debt with nothing saved for emergencies. So unless you’ve got a money fountain in your backyard (or a generous trust fund), you need a plan for how you spend your hard-earned cash.

Creating a budget — and sticking to it — could give you the financial freedom you crave. And it doesn’t have to be a grueling process.

How to Budget in 4 Easy Steps

Gain control of your personal finances by learning how to budget in a way that makes the most sense for your lifestyle. We’ve laid out exactly what you need to do to create your own model budget in four pretty simple steps.

Step 1: Know Your Net Income and Average Expenses

Before you can make your budget work effectively, you need to know your numbers. We typically like to focus on a monthly budget, since most bills are due once a month.

Get started by logging into your checking account online and grabbing your last couple months’ worth of bank statements. While you’re at it, grab your credit card statements, too.

Pro Tip

Exporting your statements to a spreadsheet or using highlighters on printed statements can help you see patterns in your income, spending and savings habits.

How to Figure Your Monthly Income

First, write down your monthly income.

This should be your take-home pay for the month — your net income. That’s the money you earn (your gross income) minus deductions for taxes, Medicare, Social Security, health insurance contributions and allocations to retirement accounts like your 401(k).

This part is easy if you have a full-time, salaried job. If you are paid by commission, work hourly or have irregular income (like freelancing), use an average of the last six months to get a rough idea. Self-employed budgeters can benefit by taking a step back each quarter to examine their income.

“When you’re self-employed or have significant freelance income, you’re typically required to make quarterly estimated tax payments,”said Robin Hartill, a Certified Financial Planner and senior editor and writer for The Penny Hoarder. “Having to check in four times a year can be great for your budget.”

Hartill said you can also make more frequent estimated tax payments if that helps you budget your self-employment income better.

“Making payments weekly or biweekly instead of four times a year can make budgeting for taxes a lot more manageable,” she noted.

Pro Tip

Here are some budgeting tips to manage your money when you don’t make the same amount from month to month.

But don’t just stop there when calculating your monthly income. Add any extra money that comes in from your side hustles, child support payments, recurring bonuses or stipends, financial aid payments — include it all.

How to Figure Your Monthly Expenses

Your next step is the painful part: It’s time to log your monthly expenses to see how much you spend.

Start with your regular fixed expenses, which may include:

  • rent or mortgage payment
  • utilities
  • car payment
  • car insurance
  • life insurance premiums
  • credit card payments
  • student loans
  • other debt repayment
  • cell phone bill
  • internet
  • cable TV
  • other monthly subscriptions, like Netflix or Spotify.

Don’t forget to include non-monthly but recurring expenses, such as:

  • vehicle registration fees
  • credit card fees
  • HOA fees
  • professional association dues
  • annual subscription renewals

To incorporate these non-monthly but regular expenses into your monthly budget, add up the total cost for a year, then divide that number by 12 to find out how much they cost each month.

You can save up for these annual expenses by setting up sinking funds so that you’re prepared to pay the full cost when the bill comes due. You may even want to open a separate bank account for those expenses so you’re not tempted to spend the money.

From here, start adding up your variable expenses. Analyze your spending habits. How much are you spending on necessities that aren’t fixed expenses, such as groceries and clothing? What about the amount of money you drop on nonessential expenses like eating out and drinks with friends?

To get a full picture, organize your spending into budget categories. For example, movies, concerts and museum visits can all go under entertainment. Your gym membership, yoga membership and the drop-in rate on a CrossFit class can all go under fitness.

Look at a few months of statements to get an average for this part, too. That will give you a more accurate picture of your finances.

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Step 2: Set Your Financial Goals

If you’re going to succeed at this budgeting game, you need to have an idea of what you’re hoping to accomplish. When you create a budget, it ought to align with your goals.

It can be a simple short-term savings goal like building a modest emergency fund or funding a vacation with your college besties. Or it can be a long-term one, like learning to budget so you can pay off your mortgage early or sending your kid to college without student loans. And don’t forget about funding your retirement — no matter how far you are from that milestone.

Pro Tip

If you see an area where your spending is out of line with your goals, fix it by outlining a new budget that directs more of your income to your top priorities.

Set a goal, and make it a motivating one — your financial plan could be the only thing that stops you from using your credit cards to indulge in mindless retail therapy.

Next, get your priorities in order — literally. Write them down in order from most to least important to get an idea of where you want your money to go.

You might not get your priorities right the first time, and that’s okay. It’s challenging to choose one option over another, and if the first list doesn’t work well, you can always rework it. Do some adjusting to strike a balance between “fun” and “responsible” spending.

You can take things a step further by mixing financial goals with personal ones. For example, vowing to cook more at home will help you spend less on restaurant meals and stick to healthier food choices.

Step 3: Find Your Favorite Budgeting Method

The Penny Hoarder surveyed 2,000 U.S. adults and found about 40% of budgeters use a spreadsheet budget, 17% use a zero-based budget, 12% follow the cash envelope method and 7% use a 50/30/20 budget.

Once you have a complete picture of your finances, it’s time to pick the budgeting plan that works best for you. There are many different budgeting methods to choose from.

Spreadsheet Budget

Log your income and track your spending using a Microsoft Excel spreadsheet or a Google Sheets spreadsheet. Create bar graphs, line graphs and pie charts for data visualization.

Zero-Based Budgeting

A zero-based budget is a budget plan where you allocate where every dollar of your income is going each month. When you take your income and subtract all your planned spending, savings allocations and debt payments, you should end up with zero.

Cash Envelope System

Followers of the cash envelope system fill envelopes with money to coincide with their spending limits for all of their variable expenses, like groceries or entertainment. Once the envelopes are empty, you have to pause your spending until the end of the month or whenever it’s time to refill your envelopes.

50/30/20 Method

With the 50/30/20 budget plan, you spend 50% of your income on essential expenses, 30% on fun and 20% on financial goals like saving, investing or paying off debt. You don’t have to drill down on exactly how much to spend on transportation or take out — as long as you stay within the appropriate percentages.

Bare-Bones Budget

A bare-bones budget takes into account only your most essential needs. It’s fitting for those with low income or people who are trying to eliminate the fat from their budget so they can stack up cash for an emergency fund, other savings or paying down debt.

Bullet Journal Budget

Use a bullet journal budget to creatively track where your money’s going. A journal gives you the ability to customize your budget how you see fit and make it attractive so that you actually don’t mind sitting down to manage your money.


Kakeibo is a long-standing Japanese budgeting method that incorporates mindfulness into a basic household ledger. You track your spending by using four simple budget categories — needs, wants, culture and unexpected/extra expenses.

Calendar Budget

With the calendar budget method you use an actual calendar to write down when you get paid, when your bills are due and when you spend money. Jot down your remaining balance at the end of each day.

Half-Payment Method

The half-payment method helps take some of the stress away from paying recurring bills each month. You budget for half of your regular household bills a month early so this way you don’t face as big a financial burden when the bills actually come due.

Paycheck Budget

The paycheck budget ignores the typical rules of creating a budget to cover your expenses for a month. Instead you budget for each time you get paid — whether that’s weekly, biweekly or semi-monthly.

Even after you’ve picked your favorite budgeting method, don’t be afraid to bend it a little to fit your financial situation. You might choose to incorporate different aspects of various budgeting methods into your personal budget. For inspiration, learn how Kumiko Love, of The Budget Mom, combined three budgeting styles to form her budget-by-paycheck method.

Step 4: Find the Best Budgeting Tools for You

You’re not alone in this quest to budget your money. There are tools and actions that can help.

Automate Your Budget

Automating the budgeting process helps you focus on your priorities by sending the money where it needs to go before you have the chance to blow it on an impulse.

On the income side, that can mean setting up the automatic deposit for your paycheck to be divided between your checking and savings account.

In the expenses column, you can set up autopay for monthly expenses like your car payments, student loans or credit card bills, helping you avoid those dreaded late fees. And if your bill due dates don’t jibe with your cash-flow situation, you can call a lender or company and ask them to adjust the date.

To grow your emergency fund, you can have a portion of your direct deposit go into a savings account each time you get paid.

Budgeting Apps

While budgeting by hand works great, your smartphone can streamline it. A budgeting app takes some of the work out of money management and serves as a real-time tool for tracking spending.

The Penny Hoarder’s 2021 budgeting survey found that 14% of those who budget use an app. Mint was the most popular, followed by EveryDollar, Mvelopes, You Need a Budget (YNAB) and Personal Capital.

Many apps sync to your checking account, automatically categorize your spending and tell you at a glance how much you can responsibly spend before your next payday. Some will even make a budget for you based on your past spending habits.

Other apps require you to manually enter your spending. That process can provide you with insights about your spending habits and highlight ways to save money without you having to analyze months of bank statements.

This list of our favorite budgeting apps will help you choose one you love. If you’re managing household finances with a partner, here’s our recommendations for the best budgeting apps for couples.

Although some apps charge monthly or annual fees, you can get started with a free trial to see if it’s worth the money.

Don’t Let Setbacks Discourage You

If your first attempt to create a budget is a flop, don’t feel bad.

It’s natural to forget about some expenses or set spending limits that are too strict the first time around. Just keep at it and make adjustments as necessary.

You’re likely to fall off your budget in one of two ways: You set unrealistic restrictions for yourself and fail to meet them, or you forget to keep up your budget and give up.

Make sure to include some fun money spending in your budget so your money plan doesn’t feel so restrictive. You may need to recruit an accountability partner — a friend you can share your money goals with and who’ll remind you to stay consistent and take action when you falter.

You can connect with like-minded people and glean some budgeting tips from members of The Penny Hoarder Community.

Remember, making a budget is not a one-time event. Keep an eye on your plan as your goals and life change. Earning more income, losing a job, getting married, having kids, starting a business — each of these life changes requires you to review and recalibrate your budget to stay on track to meet your goals and live your life.

Frequently Asked Questions

A couple look over their finances at home.

How Should a Beginner Budget?

Beginners should lean into tools that will keep their spending within the parameters they set.

For example, you can download a budgeting app to keep tabs on your available funds without having to do any math. Many budgeting apps will alert you when you’ve gone over budget — or are getting close.

Another option that’s great for beginners is the cash envelope method. Using physical cash and having a limited amount to spend makes sticking to your budget more tangible.

What is the 70/20/10 Budget Plan?

The 70/20/10 budget is another percentage-based budgeting method, similar to the 50/30/20 budget. Following this plan, you divide your take-home pay into three buckets: 70% is for all your monthly spending, 20% goes to savings and 10% is for debt or donating.

This method allows you to carve out funds to prepare for future expenses, pay down debt and benefit others in your community or beyond. The 70% that’s for monthly spending must cover everything else — bills, groceries, your gym membership and outings with friends.

Because there’s no further breakdown of how you spend that 70% chunk of your income, you’ve got to be disciplined enough to ensure your discretionary spending doesn’t eat into the money you need to pay for necessities. If you lack that discipline, try automating your bill payments so they’re taken out of your account when you first get paid.

How Do I Stop Living Paycheck to Paycheck?

To break the payday-to-payday cycle, you’ve got to either earn more income or make adjustments by cutting down on your expenses.

If you focus on income, you could take on a side gig, ask for a raise or find a new job that pays better than your current one. If you get a nice windfall — like a bonus or a big tax refund — hold onto that cash so you can build up a savings buffer and stop living paycheck to paycheck.

If you focus on cutting expenses, zero in on your major recurring costs to make a big impact on how much you spend. Fixed expenses don’t have to be permanent. Can you take on a roommate to cut your living expenses in half? Are you willing to downgrade to a less expensive car to reduce your auto payments?

If you tend to overspend on variable expenses — such as eating out or household items — start paying yourself first by automatically putting a percentage of your take-home pay into savings so you aren’t tempted to spend it.

How Much Money Should I Save Each Month?

Many financial experts advise saving 20% of your net income. While that’s a good savings goal, how much you should save depends greatly on your individual situation.

If you don’t make much money or you have a lot of essential expenses, you might want to start with saving 5% or 10% of your income. You can work your way up to saving 20% as your income grows.

Of course, if you’re able to save more than 20% of your income, that’s wonderful. You’ll be able to reach your financial goals faster. Just make sure to prioritize having an emergency fund and contributing to retirement before focusing on other goals, like going on a dream vacation or saving up for a down payment on a new car.

Other Budgeting Resources

Budgeting For Beginners

Budgeting Methods

Budgeting Tips

Key Takeaways

  • To get a clear picture of your spending, analyze several months’ worth of expenses.
  • Setting a financial goal is one of the most important steps to succeeding at budgeting your money.
  • There are countless budgeting methods out there. When you find one that works for you, feel free to bend the rules to fit your situation.
  • Use a smartphone app to streamline your budgeting process.

Nicole Dow is a senior writer at The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Spare5 Review: Get Paid for Tasks or A Scam?

It’s amazing that there are so many ways to make money online, including with your smartphone. Yes, you heard right! You can use your smartphone ...

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How to Invest in Bonds

Investment conversations typically focus on the stock market, but any financial adviser will tell you a portfolio is strongest when it’s diversified. That means you don’t want to only invest in stocks. A balanced portfolio contains bonds as well.

Bonds are inherently low-risk investment options, but they also don’t have the high potential earnings of stocks. Instead, buying bonds provides a hedge against riskier stocks.

Understanding when and how to invest in bonds is an important piece of your investment strategy.

What Is a Bond?

When you need to buy something you don’t have all the money for, you take out a loan. When corporations and governments need to take out loans to raise money for a specific endeavor, they issue bonds.

They promise to pay back lenders (that’s you!) in a set number of years at the bond’s maturity date, or when the bond ends. A corporation or government can issue bonds for things like funding research for a new product to raising money to build new infrastructure.

The bond issuer also makes interest payments along the way, typically twice a year. These are known as coupon payments.

One exception: zero-coupon bonds, which don’t pay interest until the maturity date. Some people choose them as investments for their children with the idea that the bond will mature when it’s time to pay for college tuition.

3 Types of Bonds Explained

There are three main types of bonds to know about as a beginning investor in the bond market: treasury bonds, municipal bonds and corporate bonds.

Treasury Bonds

Also called T-bonds, Treasury bonds are issued by Uncle Sam. They are entirely backed by the federal government, and they’re issued at maturities of 10 to 30 years. The interest you earn is tax-free at the state and local levels, but you’ll still pay federal taxes on it.

The biggest draw of a treasury bond? It’s essentially risk-free unless the U.S. government goes under. And if that happens, we probably have bigger things to worry about.

Treasury bonds typically yield similar interest rates as comparable municipal bonds.

Municipal Bonds

Municipal bonds, also called “munis,” are issued by cities, states and other local governments to fund projects like building roads or renovating parks.

Interest on a municipal bond is exempt from federal taxes. When you purchase a municipal bond in your own state, the interest is often exempt from state and local taxes, as well. An added win: As a citizen, you enjoy the rewards of your investment by using the services of your city and state every day.

There are two types of municipal bonds:

  • General obligation bonds, which are used to fund public works. These bonds are backed by the full faith, credit and taxing power of the issuer. That means that, if necessary, the issuer will raise taxes to repay bondholders.
  • Revenue bonds are backed by a specific project, like a hospital, toll road or stadium. They aren’t backed by the full faith and credit of the issuer, which makes them riskier. They pay higher interest rates than general obligation bonds because of the higher risk.

Corporate Bonds

Corporate bonds are the riskiest of the three types of bonds.

Unlike the previous two categories of bonds, these bonds are issued by companies. Purchasing a bond from a company is different from purchasing stock, which gives you partial ownership in that company, whereas with a corporate bond, you’re lending a company funds.

They come with credit risk, which means that if the corporation can’t afford to make its debt payments, bondholders may not get their interest and principal payments. If the corporation files for bankruptcy, secured creditors get paid in full before bondholders recoup their bond investments.

The biggest draw of a corporate bond is that it will typically pay out the highest interest rate of the three main categories of bonds.

Two people look at their investments on their phone.

4 Benefits of Investing in Bonds

Investing in bonds has several key benefits:

1. They Are Generally Safe Investments

All investing involves risk at some level. There’s virtually no risk of default with Treasury bonds, but because the risk is low, so are the interest payments. You run the risk that they won’t keep up with inflation. You could also miss out on other investment opportunities that yield better returns. But if you’ve got slim to no risk tolerance, these bonds may be up your alley.

It is very unlikely that the issuer of a municipal or high-quality, investment grade corporate bond will default — but if they do, you lose out on that investment. (Default is a greater possibility with junk bonds, which are the riskiest corporate bonds. They pay a high yield to compensate investors for their increased risk.)

Because the stock market can be so volatile, fixed income investments like bonds can balance out the high risk of stocks. This is especially important as investors near retirement age and can’t afford as much risk. Many financial planners recommend that investors gradually shift more of their portfolio from stocks to bonds as they get older.

2. They Provide Fixed Income

Bonds offer some regularity to your income stream, because you can typically count on the coupon payments twice a year. Because bonds offer fixed income, they’re a popular investment choice for retirees. In fact, another term for bond is fixed income security.

This is a stark difference from stocks, which are much more volatile and thus cannot be relied on for fixed income.

3. They Give You the Chance to Give Back

Municipal bonds in particular are appealing because they give you a sense of improving your own community. The same can be said of Treasury bonds, just on a larger scale.

Even corporate bonds can instill a sense of investing purpose if you are passionate about a specific product or brand for which the company is trying to raise money.

4. They’re Easy to Manage

If you don’t use a financial adviser, playing the stock market can be tough. When do you buy? When do you sell? And how do you do those things?

With bonds, you can earn income just by buying once and letting the bonds mature — although some investors do sell their bonds before the maturity date at a profit or loss.

3 Drawbacks to Investing in Bonds

Bonds are not without drawbacks. Here are a few:

1. Most Bonds Aren’t High Earners for Your Portfolio

Bonds provide stability in a diversified portfolio, can be a reliable income source and balance out high-risk stocks. However, the lower the risk, the lower the reward. Compared to stocks, bond growth is minimal.

Large stocks have had average annual returns of 10% since 1926, while large government bonds earned average annual returns of 5% to 6% over the same period, CNN Money reports.

2. There Is Still Risk Involved

Keeping your money in a CD, money market account or savings account at your financial institution carries no risk, because deposits up to $250,000 are insured by the Federal Deposit Insurance Corp.

Buying bonds, however, carries some risk, though it is small compared with that of stocks. A bond issuer could default on the bonds, meaning you might not earn interest, might lose your principal investment or both. This is known as credit risk.

Another type of risk with bonds is interest rate risk. When interest rates rise, bond prices — and thus the value of your bonds — decrease because investors can earn higher interest rates elsewhere. But there’s an upside to interest rate risk: When interest rates drop, bond prices go up, meaning your bonds could be easier to sell if they’re paying interest rates that are higher than the current market rate.

Inflation risk is another liability to consider: If the interest you’re earning from a bond doesn’t keep up with inflation, you’re essentially losing money because you’re losing buying power.

Finally, there is liquidity risk. Whenever your funds are tied up in assets, whether the stock market or the bond market, they are illiquid. If you need to sell your bonds to meet a financial obligation but can’t find a buyer, you might have to sell at a lower price and lose money.

3. Your Funds Are Tied up

When you purchase bonds, you generally need to be committed to investing for the long haul. With savings accounts, you can access your money when you need it, and stocks can be bought and traded as you see fit. Bonds, however, require you to wait until they mature to get the full rewards of the investment.

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How to Invest in Bonds

Unlike stocks, which are traded on a public exchange, bonds must be purchased from brokers — unless you are interested in government bonds, which you buy from the United States directly.

How Are Bonds Rated?

A bond rating signifies to investors how strong a bond is and how likely the issuer is to pay back the principal with interest. But where do such bond ratings come from? Ratings agencies.

You can use bond ratings from Moody’s, Fitch and Standard & Poor’s to assess the strength of a bond. In general, you should concern yourself with a bond’s credit quality, maturity and yield.

At first glance, the rating system can be confusing. AAA to Aaa bonds are considered high-grade bonds that have a high chance of being paid (though they’ll also likely have a lower interest rate). BBB to Baa are also considered investment-grade bonds; they will not likely default.

When you get down to BB and Ba bonds,or junk bonds, you are taking on a little more risk since such bonds are subject to greater price volatility. Remember: Greater risk brings greater reward.

A bond rated as D is currently in default. Stay far away.

Individual Bonds vs. Bond Funds

How much money you can invest in bonds depends on several factors. Individual bonds issued by the U.S. Treasury, for example, are sold in $1,000 increments. Municipal and corporate individual bonds are usually sold at the $10,000 level or higher, sometimes even reaching $100,000.

Bond funds (bond mutual funds and bond exchange-traded funds) are alternatives to purchasing individual bonds. Bond mutual funds and bond ETFs represent a range of investments all poured into a single bucket. If one of the bonds defaults in that bond fund, you still have the other bonds to protect your investment. Diversification is the beauty of bond funds; financial advisors commonly use mutual funds (both bond funds and stock funds) to protect you against big risks.

You’ll have to go through a bond mutual fund company to purchase any bond mutual funds, but bond exchange-traded funds are traded on stock exchanges.

When you purchase individual bonds, you will need to thoroughly research the issuers before putting your faith in them.

If you are serious about investing for your future, bonds will play an important role — but not the leading role. To figure out the right balance of stocks and bonds for your investment portfolio, talking with a financial adviser is a good place to start.

How to Open a Brokerage Account

Unless you are investing in government bonds, you will need a brokerage account for buying bonds. You can work with a financial advisor to open and manage a brokerage account (and get helpful investment advice) or even utilize a robo-advisor, but you can also own a brokerage account without the help of a third party.

We highly recommend using a financial advisor or investment platform for managing a mutual fund or exchange-traded fund as part of a larger investment strategy, but more skilled investors may prefer to manage things themselves. Want to go it alone? Get our tips for opening a brokerage account in 4 easy steps.

Frequently Asked Questions About Bonds

Are Bonds a Good Investment?

This depends on your goals and risk tolerance. Bonds are low risk, but their payoff is often not much better than the interest rate of a high-yield savings account, and the money is far less liquid. Bonds make more sense as part of a well thought-out, diversified investment strategy. As you enter retirement, bonds can be a reliable source of fixed income.

How Much Do I Need to Invest Directly in Bonds?

This depends on the type of bond. The U.S. Treasury sells individual bonds for as low as $1,000, and corporate and municipal bonds typically start higher. It’s much easier to build a bond portfolio by buying shares of a bond mutual fund.

Can I Invest Directly in Bonds?

You can purchase most bonds through a broker. If you are new to bond investing, we highly recommend working with a financial advisor.

Treasure bonds are the exception to the rule. You can buy most government bonds directly from the government.

What Is a Bond Ladder?

Bond ladders are an investment strategy that, over time, ensures that you always have bonds maturing and thus are always getting a nice chunk of cash paid out.

For example, if you have $200,000 to invest (in theory), you could invest $20,000 a year in 10-year bonds. At the end of the 10th year, the first bond will mature and pay out. You can pocket that payoff, reinvest the initial $20,000, and wait for the next bond to mature the following year. At that point, you will have an endless source of income with bonds maturing every year.

Timothy Moore is a market research editor and freelance writer covering topics on personal finance, careers, education, travel, pet care and the automotive industry. His work has been featured on, Ladders, Glassdoor and The News Wheel.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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