If you are saving money for your family, you need to know that the money you set aside will be there when your loved ones need it. You may also want the money you save to grow, so that you can provide even more money when the time comes to withdraw it. Municipal bonds can help you achieve these goals. Do your homework, and you could set up an effective savings plan for your loved ones.
Preservation of Savings
When you buy a municipal bond, you are loaning your money to a city, town or other local agency. The issuing entity agrees to pay you back in full. That means you will get back all the money you originally put into the bond.
You can check on the likelihood of the issuer honoring its promise to repay by looking up credit ratings. Credit rating agencies like Moody’s, Standard and Poor’s and Fitch not only rate individual municipal bonds, they also rate issuers, such as cities and government agencies. If you buy high-rated municipal bonds from trustworthy issuers, you are more likely to preserve all the money you set aside for loved ones.
Since no one can touch the principal, it is impossible to spend the money you set aside. This helps ensure that the money will go to the purpose you intended it for.
This method of saving for loved ones locks the money away in the bonds, and when the bonds reach a certain date, the money comes back to you. Timing that date to match your wished for when the money will be distributed puts you in charge of your financial dealings and ensures that the monetary legacy you want to leave stays intact.
Reinvesting Interest Payments
Your municipal bonds pay interest. Instead of spending those interest payments, you can place them in an interest-bearing account. You can also use them to buy a certificate of deposit at a bank. If you collect enough interest payments, you can even purchase more municipal bonds with the interest money.
In other words, reinvesting interest payments builds savings faster. You can end up with much more money than you originally put into the municipal bonds. You’ll be earning interest on your interest.
You won’t pay taxes on the interest payments if the state you live in allows a tax exemption for municipal bond interest. In addition, you won’t pay federal income tax on the bond interest. This means the money you set aside to save for your loved ones won’t get eaten up by taxes each year.
When you’re ready to start your savings plan, you can check the laws regarding taxes on municipal bond interest in your state. Then you can contact your broker to begin looking for municipal bonds in the area where you live. Check the bond rating agencies to see if the bonds and the issuers are credit-worthy, and designate the amount you want to start putting into municipal bonds. At the same time, you can choose where you will park the interest payments when they come in, so that they will earn more interest.