Our discussions on bonds continue. After learning the bond basics and making the investment, what should you do with the income? As a refresher, a bond is a debt instrument in which an investor loans money to an entity in return for receiving a fixed or variable interest rate, with interest being paid at regular intervals. The basic rule of the time value of money states that money loses its value with the passage of time. What you can buy today with a certain amount of money will be a lot more than tomorrow due to rising inflation. As a result, learning how to best spend your bond interest is quite helpful. Some ways in which you can spend your bond interest income are:
Reinvestment of Interest Income
Robert Kiyosaki, the author of the bestselling book “Rich Dad Poor Dad” once said, “Don’t work for money; make it work for you”. Reinvesting your interest income will help you to develop a healthy financial habit along with allowing you to achieve your financial goals in a shorter time. Reinvesting money in bonds is especially useful in a scenario of rising interest rates. With the interest income earned, you can invest in new bonds that offer higher interest rates. Also, you can invest your bond interest in a mutual fund or an exchange-traded fund (ETF) or diversify into other asset classes such as stocks.
Accumulating to purchase additional securities
If the interest income is not enough to reinvest immediately, you can save your interest income and accumulate it until you have enough to buy additional securities. A great place to accumulate the interest income is on a repurchase agreement. Buying additional securities with your interest income opens a new source of revenue for you. Now, you would be receiving income from multiple sources. In the words of great investor Warren Buffett, “Never depend on a single income; make the investment to create a second source”.
Funding your Future
The best part about bonds is that you can easily and accurately predict the amount of income that you will receive in the future. As a result, you can use bonds for planning your expenses and meeting your future financial needs. This is extremely useful to an individual who is looking at pension needs for retirement.
So, when buying bonds, also make plans for the interest income. Let your financial advisor know if you plan to reinvest, accumulate, or use the interest income to meet expenses so that they can guide you accordingly.
Anna-Joy Tibby is the Assistant Vice-President, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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