Municipal bonds, in many ways, offer investors the best of many worlds: an opportunity to invest in your community while receiving a decent return at a relatively low risk. And although they’ve traditionally been difficult to source, at Neighborly we’re doing our best to make it easier than ever to discover local purchasing opportunities. Let’s review some scenarios in which municipal bonds might make sense from both a practical and emotional standpoint.
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Passionate About a Community or Cause
When you invest in a municipal bond, you’re investing in a specific place or project. Municipal bonds offer a unique opportunity to make money while supporting your local community. In this regard, muni bonds are a feel good sort of investment, as the area or project you help fund can contribute directly to the betterment of those around you.
Let’s take your local hospital system as an example. If it’s lacking in facilities and equipment, it may seek to raise money by issuing bonds. By purchasing those bonds, you’re essentially lending the hospital system money to improve its services and amenities, thus helping your fellow community residents get the best possible care.
Neighborly offers numerous opportunities for locals to invest in the things that matter most to them. You can search for municipal bonds that support initiatives such as education, green spaces, transportation, healthcare, and housing, to name just a few. Once you select the category that appeals to you, you’ll be presented with investment options based on your locale. It’s an easy, seamless way to get connected to a truly meaningful investment.
High Tax Bracket
The interest earned from muni bonds is exempt from federal taxes, and if you purchase tax-exempt bonds issued by the state in which you reside, that interest will (unsurprisingly) be exempt from state taxes as well.
Not sure where you fall in terms of tax brackets? You can consult the IRS’s website and view its tax tables to get a general idea of where your income puts you for federal income tax. Keep in mind that a variety of factors come into play to determine your effective tax rate. Income taxes are different for everyone and you should consult with an accountant or tax professional before making any decisions based on the tax implications.
Though there are scenarios in which muni bonds can serve as a smart short-term investment, they may also work well as part of a long-term savings plan. If you’re looking for a way to lock in relatively stable returns over a long period of time, munis may be a good choice.
While it’s generally true that you can sell off your muni bonds at any time, you may not want to do so if market conditions are unfavorable or if something happens to the issuer. That’s why munis don’t always work as a short-term investment. We find that most financial advisors will recommend that you set aside enough money to cover three to six months’ worth of expenses in case you lose your job, fall ill, or find yourself in any type of situation where you’re suddenly without an income. Because muni bonds aren’t as liquid as cash or a number of other investments, you may not wish to count on them to cover unexpected expenses such as a health emergency or unforeseen home repair.
On the flip side, if you’re secure financially and can afford the buy-in (typically $5,000 at a minimum), muni bonds may help you meet your long-term savings goals. Remember, you don’t have to sell your bonds at a profit to make money. If all goes well, you can simply sit back and collect interest payments every year until your bonds come due.
Not big on taking risks? Muni bonds may complement your investment strategy. Because they have historically low default rates, munis often appeal to those hesitant to invest in more volatile instruments like stocks or corporate bonds.
Higher-rated muni bonds are statistically less likely to default than those with lower ratings. In fact, there have been no Aaa-rated municipal bond defaults since 1970, and since then, only 0.01% of muni bonds with an Aa-rating have defaulted. Additionally, some muni bonds carry insurance, which is designed to offer an added layer of protection.
The Bottom Line
There are plenty of good reasons to consider investing in muni bonds, and if your appetite for risk is low to moderate, they may align quite well with your current strategy. While you can purchase municipal bonds through a broker, Neighborly offers a seamless, user-friendly platform for exploring and acquiring them. You can sign up today to learn more and begin investing in your favorite city or cause.