Finance – Page 4 – Aspiring Nirvana

Ultimate Guide to understanding Bonds

A bond is simply a loan given to government or corporation in return for interest on the loan.

What is a bond?

When a government entity or corporation needs money to grow, it can access that money via multiple options, one of which is by issuing bond. A bond is issued for a fixed timeline, price and interest rate. An entity or individual who buys the bond is called bondholder and is paid interest over the timeline of the bond and gets the principal back at the end of term.

What are different types of Bonds

Government Bonds – Issued by federal government
Municipal Bonds – Issued by state or local governments
Corporate Bonds – Issued by corporations

Why should I buy bonds?

Bonds pay a steady stream of interest payment over their lifetime and return full principal at the end of the term. This enables the bondholder to easily predict the rate of return on their initial investment. Bonds are thus considered safer investment than stocks and reduce overall risk of your investment portfolio. Additionally, interest earned on certain bonds may be tax free thus increasing their overall return.

How can I buy bonds?

The easiest way to buy bond is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what bond funds (Mutual Funds or ETFs) you are interested, buy and hold them, and sell as per your financial needs.

Is there no risk to owning Bonds?

Bond investing is considered safer than stock investing. However, they also provide lower returns compared to stocks. You will always get fixed return on your investment no matter how well the company may be doing.

In some cases, you may not get timely payments if the borrowing entity is experiencing hardship. In rare cases, you may completely lose your money if borrowing entity declares bankruptcy.

How can I mitigate risk?

There are multiple options to lower risk of bond investing:

Buy Index Funds (basket of multiple bonds)
Buy Mutual Funds or Exchange Traded Funds ETFs (basket of multiple bonds in one category)
Buy bonds that are rated high quality and investment grade

Final Verdict

Bond investment provides stable returns and is thus considered safer than stock investment. However, keep in mind that they provide lower returns than stocks. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

Helpful Links:

https://en.wikipedia.org/wiki/Bond_(finance)

Everything you wanted to know but were afraid to ask – Stocks

A stock simply represent an ownership interest in a company with an expectation of reaping financial benefits if the company performs well.

What is a stock?

When a public company needs money to grow it’s business it can access that money via multiple options, one of which is by issuing stock to the public for a set price. An individual can then buy that stock for a price for which it is currently available in the stock market. By buying stock of a company the individual “owns” part of the company and hopes to make profit by selling at a higher price than initially purchased.

Why should I buy stocks?

Historically, stock market has provided about 8% return. It is one of the easiest way to generate passive income.

With zero trading fees, easy access to company performance, readily available analyst reports, one can buy/sell stocks with just a click of a button.

How can I buy stocks?

The easiest way to buy stock is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what stocks you are interested, buy and hold them, and sell as per your financial needs.

Why do stock prices fluctuates?

Stock price constantly fluctuates based on the supply and demand in the market.

The stock price of a company generally goes up if there are more buyers than seller and vice-versa. Stock price of a company tends to go higher if the company performs well (growth or profit) and thus more people are interested in buying its stock. On the other hand, stock price will drop if the company performs poorly .

Why are stock considered risky?

As stock price constantly fluctuates, you may lose your money if you need to sell at a time when the price is lower than your original purchase price. In fact, in rare cases, you may completely lose your money if company goes bankrupt. Remember, money invested in stocks is not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.

How can I mitigate risk?

There are multiple options to lower risk of stock investing:

Buy Index Funds (basket of multiple stocks)
Buy Mutual Funds or ETFs (basket of multiple stocks in one category)
Buy stocks of well-known brands at a reasonable price and hold for long-term
Buy some bonds as they are more stable than stocks
Employ Dollar Cost Averaging, that involves buying stock with a fixed dollar amount each month

Final Verdict

Stock market has historically provided about 8% return and is one of the best way to earn passive income. But there are chances of losing money in it. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

Is investing in 401(k) a good idea for Retirement?

A 401k is a retirement plan offered by companies in which the employees contribute part of their salary with employers usually offering matching contribution.

Introduction A 401k is a retirement plan offered by companies to their employees. Employees can contribute part of their salary to the plan, invest in various mutual funds, and let it grow tax-free until withdrawal time. Contributions to 401k are tax-free (up to an annual limit) which will lower your taxes. On top of that, most companies provide matching contribution.

Pros

401k money grows tax-free until withdraw time post retirement, thus providing better returns compared to taxable account
Employer matching contributions are like free money
Contributions are automatically deducted from your salary
You will probably be in a lower tax bracket when you take money out during retirement

Cons

The 401k plan investment choices may have mutual funds with high fees
You will eventually pay taxes when you take the money out
There are early withdrawal penalties if money is taken out before retirement

I am not sure if I can save part of my salary

What if your employers offers you a 5% raise. Will you ever say No? Never!

That is effectively you are doing by not contributing part of your salary to 401k, assuming your employer matches your contribution. Even if there is no matching, you are still saving money on taxes while securing your retirement.

I am afraid of losing money in stock market

It is a valid concern! Although no one can predict the future, US stock market has always bounced back after every crash.

Money invested in 401k is for the long-term retirement purpose. There will be short-turn bumps but if you stay the course and not panic, then you will come out a winner in the end.

Additionally, there are various strategies (Ex. Dollar cost averaging) to overcome unique risks to your situation that allows you to invest money in higher or lower risk options.

What happens to my money if I change jobs

When you change your job, you can:

(1) Rollover money from previous employer plan to new employer 401k plan

(2) Rollover money to IRA (Individual Retirement Plan)

Remember, 401k money belongs to you! You have full control over what to do if you change your job.

Action Items to start 401K

Decide what percentage of your salary you can contribute to your 401k
1. At a minimum, contribute to take full advantage of your company matching
Work with your company HR to set up your 401k Account
Select which mutual funds to invest in
1. Start by investing in target-date funds as they choose allocation per your retirement age
2. As you get comfortable, you may want to invest in a mix of Index Funds and Bond Funds
Set up to automatically deduct money from you salary

That’s it! Sit back, relax and watch your money grow over time!

Final Verdict

For salaried people, contributing money to 401k account is one of the best way to save for retirement, get free-money from employers, reduce taxes and comfortably save for retirement.

The key is to start early, contribute regularly and let your money grow over time!

We hope the information in this post will be helpful in your journey of aspiring nirvana!