Any personal finance expert would agree: It’s usually a responsible, smart choice to find the best possible interest rates when it comes to your savings and investments.
If you’re looking to maximize your savings return, high interest fixed rate bonds could be a great option to add to your portfolio. After all, who can argue with rates that have consistently been near 7% in recent years?
What is a Fixed-Rate Bond?
A fixed rate bond is more of a long-term investment where your money is essentially locked up for a period of time (most bond options range between one and five years). In exchange for you giving up access to your money for the predetermined time frame, you are typically handsomely rewarded with higher interest rates.
The rates for fixed rate bonds are particularly higher than those of accounts where you can readily access your money anytime you wish: The traditional accounts with greater (and more frequent) access options have been paying up to 1% (if you’re lucky!), where fixed rate bonds, especially in the UK, have closed closer to 6-7%.
Pros and Cons of Fixed-Rate Bonds
As with any investment, fixed rate bonds come with a myriad of pluses and minuses. Ensure you’ve done your due diligence before you sign on the dotted line by keeping these factors in mind:
Pros:
- High interest rates
- Interest rates are locked for the life of the term
- You can’t spend money that’s not at your immediate disposal!
Cons:
- Penalties will be incurred if you pull your money out before the maturity date–even if it’s for an emergency.
- You can avert this type of financial crisis by ensuring you have an established emergency fund outside of the money you lock into the bond
- Most fixed-rate bonds are purchased in a one-time, lump-sum investment–you won’t be able to add more to the funds as you go
- Before you purchase your bond, save up so that your budget and other savings isn’t impacted when you withdraw these funds to put them into the bond fund
How to Find the Best Fixed-Rate Bond
When it comes time to purchase your bond, ensure you’ve done your homework regarding the options that are available to you. You can set yourself up for a bigger return by remembering to take a look at these factors:
- Interest Rates. What is the bond’s initial and ending interest rate? Once your bond matures, the interest rate usually drops so make sure you understand the terms at the onset of the investment and at maturity. You should also know when/how interest is paid to you–will be a monthly payment or is there another arrangement such as full payment upon maturity?
- Penalties. Educate yourself about the penalties that come with the fixed-rate bond choice you’ve made and ensure you can afford them if you happen to end up needing to pay them.
- Bank requirements. These include whether or not you need to have an account with the bank in order to purchase a fixed-rate bond there, if the brokerage has minimum purchase requirements, etc.
Do you invest in fixed-rate bonds?
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