What might these lessons be? Take a look:

• Pick players carefully. Super Bowl teams don’t usually get there out of luck; they’ve made it in part because they have carefully chosen their players. And to potentially achieve success as an investor, you, too, need carefully chosen “players”—investments that are chosen for your individual situation.
• Choose a diversified mix of players. Not only do Super Bowl teams have good players, but they have good ones at many different positions—and these players tend to play well together. As an investor, you should own a variety of investments with different capabilities—such as stocks for growth and bonds for income—and your various investments should complement, rather than duplicate, one another. Strive to build a diversified portfolio containing investments appropriate for you situation, such as stocks, bonds, government securities, certificates of deposit (CDs) and other vehicles. Diversifying your holdings may help reduce the effects of market volatility. Keep in mind, though, that diversification, by itself, can’t guarantee a profit or protect against loss.
• Follow a “game plan.” Super Bowl teams are skilled at creating game plans designed to maximize their own strengths and exploit their opponents’ weaknesses. When you invest, you also can benefit from a game plan—a strategy to help you work toward your goals. This strategy may incorporate several elements, such as taking full advantage of your Individual Retirement Account (IRA) and your 401(k) or other employer-sponsored retirement plan, pursuing new investment opportunities as they arise and reviewing your portfolio regularly to make sure it’s still appropriate for your needs.
• Stay dedicated to your goals. Virtually all Super Bowl teams have had to overcome obstacles, such as injuries, bad weather and a tough schedule. But through persistence and a constant devotion to their ultimate goal, they persevere. As an investor, you’ll face some challenges, too, such as political and economic turmoil that can upset the financial markets. But if you own a diversified mix of quality investments and follow a long-term strategy that’s tailored to your objectives, time horizon and risk tolerance, you can keep moving forward, despite the “bumps in the road” that all investors face.
• Get good coaching. Super Bowl teams typically are well-coached, with disciplined head coaches and innovative offensive and defensive coordinators. When you’re trying to achieve many financial goals—such as a comfortable retirement, control over your investment taxes and a legacy to leave to your family—you, too, can benefit from strong “coaching.” As your “head coach,” you might choose a financial professional—someone who can help you identify your goals and recommend an appropriate investment strategy to help you work toward them. And your financial professional can coordinate activities with your other “coaches,” such as your tax and legal advisors.

Unless you’re a professional football player, you won’t ever experience what it’s like to play in the Super Bowl. However, achieving your financial goals can be a fairly big event in your life—and to help work toward that point, you can take a few tips from the teams that have made it to the Big Game.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Bright copper kettles and warm woolen mittens

Do you love to shop and have a penchant for finding the perfect gift? If so, then you may have just what it takes to launch your own personal shopping business. There are many individuals who are simply too busy or not able to shop for themselves and would be eager to pass this task along to someone else. While some clients may want to just give you a list of items to shop for, others may need advice on what to buy friends and family members. Grandparents, for instance, may have no idea where to begin looking for the best gifts for their grandchildren. From weaving through bumper-to-bumper traffic, to leafing through holiday sales papers and standing in long lines at check-out counters, personal shoppers give their clients what they need most during the holidays—more time!

Brown paper packages tied up with strings

One of my favorite holiday traditions is wrapping presents. For those with a two-page-long list of friends and family members to buy gifts for, however, gift-wrapping can be a daunting and dreaded task. If I learned one thing during my years as a gift-wrapping clerk at the mall, it was that some shoppers will pay almost anything to have someone else wrap their holiday gifts—all of them. During the week of Christmas, it was not unusual to spend two hours or more wrapping gifts for just one customer. Gift-wrapping is a great way to earn a little extra money during the holidays and you can do it from the comfort of your own home. Tell a few of your friends and family members about your holiday business venture—they may be all of the advertising you will need!

Doorbells and sleigh bells

The thought of lugging dusty boxes of holiday decorations from the dark corners of the basement usually evokes one of two emotions: excitement or dread. While I often dread the chore of holiday decorating, I always look forward to the result. If you have a knack for decorating and find the process enjoyable, consider starting your own holiday decorating business. There are plenty of individuals who either do not have the time or are physically unable to decorate their homes for the holidays. From trimming the tree and adorning a staircase with garland to hanging window wreaths and stringing outdoor lights, the list of holiday decorating tasks seems never-ending! Advertise your business by letting your own beautifully decorated home speak for itself. Distribute photographs of your tree, mantel and the exterior of your home in flyers or emails.

Cream-Colored Ponies and Crisp Apple Strudels

The time-honored tradition of gifting homemade confections is a great way to spread the holiday cheer. Festive sugar cookies, distinctive gingerbread houses and handmade candies are just a few of the delectable treats that keep bakers busy during the holiday season. If you are inspired by sugar and spice and everything nice, consider putting your culinary flair to work for you by opening your own holiday bakery. Host a tasting party in your home or a church fellowship hall to showcase the types of treats that you will offer. Whether you decide to offer a simple variety of baked goods or have the ability to cater an entire event, there is sure to be a sufficient market for your business.

Girls in White Dresses with Blue Satin Sashes

While the days in which every young lady was expected to know how to sew are long-gone, the days of needing dresses altered, slacks hemmed or zippers repaired are not. If you are proficient with a needle and thread, do not miss out on an opportunity to put your sewing machine to work for you! In this age of mass production, some buyers long to find something that is distinctive rather than run-of-the-mill. From offering simple alterations, to crafting custom-made holiday clothing, quilts or tree skirts, your business can be as simple or as elaborate as you wish.

If you are concerned about the cost of advertising, there are many inexpensive ways to promote your seasonal business. Social networking websites, for instance, have made it simple to advertise your business for free. Distributing flyers, sending emails or mailing postcards are some other ways to spread the word at little or no cost. You may be surprised to find that your “seasonal” services will be in demand well after the “silver white winters … melt into springs.”

For me, November not only reminds me of how wonderful family can be, but also how reliant we sometimes have to be on them. November is Long Term Care awareness month—a time for people to analyze their current long term care plans or to obtain information to finalize long term care solutions.

Needing long term care places an enormous emotional and physical strain on loved ones and family members. Incorporating long term care insurance into your financial plan can help you protect assets, reduce the burden of care on family members and provide resources for the type of care in the setting you most prefer. Some of us have been fortunate enough to plan for long term care by purchasing policies. Others have lived through the agony of a family member needing care and how difficult it can be on the caregivers. Yet, most have concerns about how to handle long term care but are not quite sure where to obtain information. Many more are not sure whether they will need it and can afford it or simply don’t see the value in it.

Obtaining information may be the easiest thing to do. Typically, you can find a long term care insurance advisor in your community that can be of assistance. Many websites will provide data on the cost of care, specifics on long term care and when adults may need care.

Currently, approximately 79 million baby boomers live in the United States. We are living longer; celebrating an 80^th birthday is not uncommon. Living a long life increases the chances of needing long term care. The federal government reports that 70 percent of people who reach the age of 65 will require long term care services at some point in their lives. Of those, 20 percent will need care for between two and five years, while another 20 percent will need care longer than five years. At a staggering $73,000 dollars per year in a nursing home, a three-year stay for one person can significantly impact family assets.

Affordability, or the lack thereof, is often one of the more commonly used objections to obtaining long term care insurance policies. In some cases, it will not be affordable. For those who need governmental assistance, as of now, it is available. For others who are not interested in asset depletion in order to obtain governmental assistance, changes to legislation have made it a bit easier to pay for long term care premiums.

For example, the Pension Protection Act of 2006, which took affect in January of 2010, will allow cash value in a life insurance or annuity contract to be utilized to pay long term care insurance premiums with little or no tax consequences. Self-employed business owners may also receive the benefit of a tax deduction for their out-of-pocket long term care premiums. This individual business owner may benefit as much as $4,240 based on age. Similarly, a C corporation, a limited liability corporation or employer paid contributions to a tax qualified long term care insurance plan may incorporate such advantages. At the end of the year, when some companies look to buy new office furniture as a write-off, long term care insurance may be a more prudent expense.

A typical response to not purchasing long term care is this: “Why should I buy something I may never use?” However, if you think about it, most people hope to never file a claim on their homeowners, automobile or life insurance policies but that doesn’t stop them from owning coverage that protects them against the risks. This train of thought applies to long term care insurance as well. The financial risks and potential familial burden are too high to do nothing. The families of claimants rarely talk about the financial benefits.  Instead, they talk about how insurance allowed their mom to be cared for at home or how nice it was to have dad in the best facility in the city.

As with most things of value, until you take the time to understand them they may not make sense as an investment. Once people become aware, however, many find it difficult to see themselves without a long term care plan. This November may be the right time for you, your spouse or your employer to review your current long term care plan and make sure it is appropriate. Perhaps the greatest benefit of long term care insurance is that it can allow loved ones to care about you instead of having to care for you.

Leon A. Hill is an independent Genworth Life Insurance Company Long Term Care Insurance Agent serving the states of Virginia, North Carolina, Tennessee, Texas and New Mexico, right here in Lynchburg.  Visit www.leonhilllongtermcare.com for more information.

In fact, various studies and anecdotal evidence suggests these differences in the way that men and women invest:

• Men tend to trade more often than women. Men seem to buy and sell investments more frequently than women. This difference could result in an advantage for women investors. For one thing, if women do trade less, they may incur fewer commission charges, fees and other expenses, all of which can eat into investment returns. Also, by holding investments longer, women may be able to take better advantage of market rallies. During the 2008-2009 financial crisis, for example, men were more likely than women to sell shares of stock at market lows, which led to bigger losses among male traders—and fewer gains when some of the stock values began to rise again—according to a study by Vanguard, a mutual fund company.
• Men tend to invest more aggressively than women. Perhaps not surprisingly, men seem to be more willing to take risks with their investments. This trait can be both positive and negative. On the positive side, risk is associated with reward, so the more aggressive the investment, the greater the potential for growth. On the negative side, taking too much risk pretty much speaks for itself. Ideally, all investors— men and women—should stick with investments that fit their individual risk tolerance.
• Women are more likely to look at the “big picture.” Although both men and women investors want information, women seem to take a more “holistic” approach—that is, instead of focusing strictly on performance statistics, they tend to delve deeper into their investments’ background, competitive environment and other factors. This quest for additional knowledge may help explain why all-female investment clubs have achieved greater returns than all-male clubs, according to a study by the National Association of Investors Corp., which represents thousands of investment clubs across the country.
• Men may be more optimistic about the financial markets. Some studies show that men are more optimistic about key economic indicators and future stock market performance. Optimism can be a valuable asset when it comes to investing; if you have confidence in the future, you’re more likely to invest for it, and to continue investing. On the other hand, false optimism may lead to over-confidence, which can have negative results for investors.

Neither men nor women have a monopoly on positive investment behaviors; each gender can probably learn something from the other. Ultimately, of course, it’s your decision-making, not your x- or y-chromosomes, that will determine your ability to make progress toward your long-term goals. So educate yourself about your choices, and get the help you need from a financial professional, as you invest through the years.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

To get a sense of this gap, consider these statistics:

• According to the U.S. Small Business Administration’s Office of Advocacy, 19.4 percent of male business owners have 401(k) or similar plans, compared with just 15.5 percent of women owners.
• The percentage of female business owners with Individual Retirement Accounts (IRAs) is about the same as that of male business owners—but the men have more money in their accounts. The average woman’s IRA balance is about $51,000, compared with $91,000 for men, according to a recent report by the Employee Benefit Research Institute. Although these figures change constantly with the ebbs and flow of the market, the difference between the genders remains significant.

One way to help close this savings gap, of course, is to set up a retirement plan for your business. But for many women business owners (and male owners, too), the perceived cost of setting up and running a retirement plan has been an obstacle. However, the retirement plan market has opened up considerably for small business owners over the past several years, so you might be surprised at the ease and inexpensiveness of administering a quality plan that can help you build resources for your own retirement—and help you attract and retain good employees.

With the help of a financial professional, you can consider some of the myriad of plans that may be available to you:

• Owner-only 401(k)—This plan, which is also known as an individual 401(k), is available to self-employed individuals and business owners with no full-time employees other than themselves or a spouse. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that can grow tax-free.
• SEP IRA—If you have just a few employees or are self-employed with no employees, you may want to consider a SEP IRA. You’ll fund the plan with tax-deductible contributions, and you must cover all eligible employees.
• Solo defined benefit plan—Pension plans, also known as defined benefit plans, are still around—and you can set one up for yourself if you are self-employed or own your own business. This plan has high contribution limits, which are determined by an actuarial calculation, and as is the case with other retirement plans, your contributions are typically tax-deductible.
• SIMPLE IRA—A SIMPLE IRA, as its name suggests, is easy to set up and maintain, and it can be a good plan if your business has fewer than 10 employees. Still, while a SIMPLE IRA may be advantageous for your employees, it’s less generous to you, as far as allowable contributions, than an owner-only 401(k), a SEP IRA or a defined benefit plan.

As a business owner, you spend a lot of time thinking about what needs to be done today, but you don’t want to forget about tomorrow—so consider putting a retirement plan to work for you soon.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. ]]> http://www.lynchburgbusinessmag.com/mag/women-business-owners-need-retirement-plans/feed/ 0 http://www.lynchburgbusinessmag.com/mag/is-long-term-care-more-expensive-than-long-term-care-insurance/ http://www.lynchburgbusinessmag.com/mag/is-long-term-care-more-expensive-than-long-term-care-insurance/#comments Mon, 15 Aug 2011 19:47:15 +0000 Leon Hill http://www.lynchburgbusinessmag.com/?p=1264 It’s certainly no secret that people are living longer. A person arriving on the Mayflower had a life expectancy of around 35 years. Someone born in 1900 had a life expectancy of nearly 65 years. These days, many have loved ones that are in their late 70s early 80s or older.  Over the last decade, life expectancy has continued to increase. Most expect to live a long, healthy life.

While there are many reports that most people are living longer and healthier lives, that is not always the case. Typically, one of two things happens: A person lives a long life and passes away, or that person lives a long life, has health issues and passes away. Most are comfortable with the first scenario, but are just as familiar with the second.

Thankfully, planning for the second scenario does not have to be overwhelming, but it does require some thought and preparation. There are four options: relying on family to provide long term care, relying on the government for care, self insurance and long-term care insurance. In some cases, a combination of these may occur, so let’s explore them individually.

Family is the first, and typically, the logical hopeful response to a long-term care event.  Most people hope or assume that a child, children or family members will provide some level of care. This may seem to be an effective strategy until you begin the detailed conversation with the family members. Questions regarding the home in which the care will be given, what family members are available, what times of the day care will be needed, what work or familial obligations need to be negotiated and whether there is enough family to help often come into play. Anyone who has ever provided care for an aged parent or family member would never consider the long involvement a burden, but when asked if would they want their children or family to do the same for them, most say “no.”

The second option is the government. There are three governmental components—the Veterans Administration (VA), Medicare and Medicaid. Due to years of service, a veteran may have the VA available for their long-term care. They may have to be displaced from their family and local community due to space restrictions, but it may be a possibility for a veteran.

Medicare provides some level of care on a short-term basis. In most cases, once someone becomes eligible for Medicare and has a long-term care event, the first 20 days are included with the Medicare benefit. On day 21, with acceptable criteria being met and progress being made, Medicare may pay up to 100 days at 80 percent of the cost of care.  Once the criteria for progressing or the expiration of the 100 days occurs, the responsibility for payment rests with the person who has had the long-term care event.

Lastly, in regard to the government, there is Medicaid. Medicaid is primarily a program that assists with those who do not have assets available to pay for care. In many cases, in order to qualify for Medicaid, there is an asset spend down to approximately $2,500.  Upon the spend down of assets, the government will participate in the long term care of that individual.

The third option is what many Baby Boomers are currently deciding to pursue—self insuring. Unless a couple has assets greater than $3 million, some argue that self insurance is not an option. It is more in line with what is known as the “hope strategy,” as in, “I hope it doesn’t happen to us and if it does, I hope we have enough money to cover it.” Obviously, self insuring can be an option if assets are aligned to cover the annual expense over a period of several years. Alzheimer’s disease and other ailments may last longer than the average and self insurers should take that into consideration.

Lastly, there is long-term care insurance. Insurance can help defray the cost of care. If an insured individual had a policy worth $220,000 dollars and needed nursing home care for three years at a cost of $70,000, the entire expense could be covered by insurance. In turn for paying the cost of care, the insurance company charges an annual premium prior to the time the insured needs care. Once the insured needed care, the premium payments would cease.

This begs the question, “Is it too expensive for something I might not use?” Perhaps the better question to ask is, “Do you ever come home from being away and wish your home had burned down or your apartment burglarized, so you could use your homeowners or renters insurance?”

In order to see the value of long-term care insurance, consider this: A couple in good health that purchases a policy during their mid 50s would likely pay $2,000 annually.  With appropriate inflation protection, this premium would guarantee this couple $108,000 of coverage immediately, approximately $216,000 at age 65 and nearly $432,000 at age 80. This premium is designed to remain fixed for those years and up until they needed care. Therefore, the investment of 30 annual premium payments equaling $60,000 provides long-term care coverage of $432,000 at age 80.

Long-term care insurance can also be considered wealth protection insurance, because it can protect assets. Families should at least have a conversation to determine a strategy that allows for options when the time arrives. A little planning today could prove to be the best way to secure your family’s wealth in the long run.

An investment can become “hot” —that is, its price can shoot up—for any number of reasons. For example, a company that provides a well-known product or service may decide to “go public” by making its shares available to investors; when this happens, the stocks become “hot” for a while. An investment may also become hot if a favorable event occurs, as might be the case with a drug company that gains permission to sell a medicine that’s much in demand. Still other investments heat up because an “expert” is touting them in the media.

Although different investments may get hot for different reasons, they all share one thing in common: They will cool off. In fact, by the time you and many other investors hear about a hot stock, it may already be cooling off. If you buy into an investment that’s been hot for a while, you should recognize that its “upside potential” may not be what you think.

To help achieve your financial goals, you may be better off by not chasing after hot stocks. Instead, consider these ideas:

Increase share ownership. One key to building wealth is to increase the amount of shares you own in your investments. Hot stocks are often expensive stocks, so you may be limited in the number of shares you can purchase. As an alternative, look for quality investments that are trading at reasonable prices. You might also consider buying additional shares in quality companies you already own.

Buy appropriate investments. Even if you can afford to buy some shares in hot stocks, should you? These stocks may not be suitable for your needs, for any number of reasons: too risky for your risk tolerance, too similar to other stocks you already own and so on. You need to own investments that are appropriate for your individual needs. Of course, you also need to keep in mind that any investment in stocks—whether hot or not—will fluctuate with changes in market conditions and may be worth more or less than your original investment when you sell.

Diversify your holdings. By continually pursuing hot investments, you might end up with an unbalanced, non-diversified portfolio. By diversifying your holdings, you can help reduce the impact of volatility on your portfolio. However, diversification, by itself, cannot guarantee a profit or protect against loss.

Think long-term. Chasing hot stocks is strictly a short-term move. Successful investors adhere to long-term strategies that require discipline, patience and a constant focus on the future.

By following these suggestions, you’re unlikely to experience the “thrill” of chasing after hot investments, but you will get the satisfaction of building a portfolio designed to help meet your important investment goals.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Your first step is to be aware of the challenges you will face. As you know, the financial crisis of 2008 and early 2009 took a bite out of just about everyone’s retirement portfolio. And even though the markets have bounced back strongly, you might still have some ground to make up in your 401(k), Individual Retirement Account (IRA) or other accounts. At the same time, budgetary pressures may lead to reductions in Pell Grants and other federally backed financial aid to students, so you may need to provide more assistance to your children than you once might have thought.

To deal with these challenges and help yourself make progress toward your college/retirement objectives, consider the following moves:

• Establish some priorities. How much should you save and invest for retirement versus college? Also, how much of the college costs would you like to cover: 100 percent, 50 percent or perhaps a set dollar amount? There’s no one “right” answer for everyone—you’ll have to establish priorities based on your preferences and family situation. But once you’ve set these priorities, you’ll have some guiding principles to govern your savings and investment decisions.

• Put time on your side. The earlier you start saving for both your retirement and your children’s college education, the better your chances of reaching your goals.
• Choose the right investment vehicles. You may want to work with a financial advisor to choose the appropriate mix of investments for your needs. But in general, it’s a good idea to contribute as much as you can afford to your 401(k) or other employer-sponsored retirement account. Your contributions are generally made with pretax dollars, and your earnings can grow tax deferred. And whether or not you have access to a 401(k) or other employer-sponsored plan, you can probably also contribute to a traditional IRA, which offers tax-deferred earnings, or a Roth IRA, which provides tax-free earnings, provided you’ve held your account at least five years and you don’t start taking withdrawals until you’ve reached age 59½. To save for college, you may want to explore a 529 plan, which also provides tax-free earnings, provided they are used for qualified higher education expenses.*
• Keep investing. The financial markets will always move up and down—so in some months, you might not like what you see on your investment statements. But the most successful investors keep investing in good times and bad. If you decide to take a “timeout” from investing and head to the sidelines during a market slump, you could miss out on the next rally.

By following these suggestions, you can keep moving forward toward two special times in your life: when your children attain the higher education that can help them succeed in life and when you can enjoy the retirement for which you’ve worked so hard.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

* Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10 percent penalty. There may be state tax incentives available to in-state residents who invest in their home state’s 529 plan. Student and parental assets and income are considered when applying for financial aid. Generally, a 529 plan is considered an asset of the parent, which may be an advantage over saving in the student’s name. Make sure you discuss the potential financial aid impacts with a financial aid professional. Tax issues for 529 plans can be complex. Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.

If you have no employees other than your spouse or a partner, you can establish an “owner-only” 401(k), also known as an individual 401(k). This plan offers many of the same advantages of a traditional 401(k): a range of investment options, tax-deductible contributions and the opportunity for tax-deferred earnings growth. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that have the opportunity to grow tax free.

Your owner-only 401(k) contributions consist of two parts: salary deferral and profit sharing. In 2011, you can defer up to $16,500 of income, or $22,000 if you’re 50 or older. The amount of your profit-sharing contribution is based on your earnings. The sum of your employer contribution and your salary deferral contributions can’t exceed $49,000 in 2011 (or $54,500 if you’re 50 or older). Keep in mind that if your spouse is employed by your business, you each can contribute the maximum amount allowed.

You’ve got considerable flexibility in funding your owner-only 401(k). Both the salary deferral and the profit-sharing contributions are discretionary, so you can change them at any time based on your business’s profitability.

Now, let’s move on to the defined benefit plan, which might be appropriate for you if you are highly compensated and have no other employees. By establishing a defined benefit plan, you’ll be providing yourself with a monthly payment (or “benefit”) for life, beginning at the retirement age specified by your plan. In 2011, the yearly benefit limit is $195,000.

The amount you can contribute to your defined benefit plan each year is based on several variables, including your current age, your compensation level and your retirement age. But you’ll certainly be able to contribute large amounts: A defined benefit plan is the only retirement account that allows contributions in excess of the limits placed on 401(k)s and other defined contribution plans. Generally speaking, the closer you get to retirement, the larger your maximum yearly contributions will be. (This is because you’ll have fewer years left in which to fund your defined benefit.) And since your defined benefit contributions are tax-deductible, you are, in effect, getting a big boost from the government to fund a generous retirement plan.

Here’s one more benefit to owner-only 401(k) and defined benefit plans: You can contribute to both of them at the same time. But before you choose either or both of them, consult with your tax and financial advisors. After all, you work hard to help provide for a comfortable retirement tomorrow—so you’ll want a retirement plan working hard for you today.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. ]]> http://www.lynchburgbusinessmag.com/mag/own-a-small-business-consider-these-retirement-plans/feed/ 0 http://www.lynchburgbusinessmag.com/mag/looking-for-income-consider-premium-bonds/ http://www.lynchburgbusinessmag.com/mag/looking-for-income-consider-premium-bonds/#comments Fri, 15 Apr 2011 17:22:07 +0000 Jeff Boyer, Edward Jones Financial Advisor http://www.lynchburgbusinessmag.com/?p=1062 As an investor, you want your money to grow so that you can achieve your important goals, such as a comfortable retirement or college for your children. But you may also invest to increase your cash flow. In fact, without a strong cash flow, you may be forced to dip into your growth-oriented investments to pay for short-term needs—and if you do this repeatedly, you could damage your prospects for attaining your long-term goals. That’s why you’ll want to look at different ways of boosting your cash flow—one of which may be premium bonds. 

To understand the nature of premium bonds, you’ll first want to be familiar with the relationship between a bond’s price and its interest rate. When a bond is issued, it sells for face (“par”) value, which is the amount returned to the bondholder when the bond matures. This bond also comes with a “coupon” rate—the interest rate that the bond will pay throughout its lifetime. So, for example, if you paid $10,000 for a 10-year bond with a coupon rate of five percent, you would earn $500 per year, every year. If you held the bond until it matured, you’d also get your $10,000 back, provided the issuer doesn’t default. But if market interest rates move up to 6 percent, and you wanted to sell your five-percent bond before it matures, you’d have to offer it at a discount from the $10,000 face value. Conversely, if market rates were to fall to four percent, you may be able to sell your $10,000 bond for more than its face value, because investors will be willing to pay a premium to earn the higher interest rate. 

Now, let’s flip the equation, so that instead of being a bond seller, you’re a buyer. If you want to increase your investment income, you might be interested in a premium bond. You pay a premium for the bond in return for higher interest payments for the life of the bond, and, if you hold it until maturity, you’ll still get the face value back (again barring a default). 

Furthermore, because premium bonds pay higher interest, they also pay a greater proportion of their cash flow before they mature, in comparison to discounted or “par” bonds. This helps provide for greater price stability, so if interest rates rise or fall, premium bond prices typically will not decrease or increase as much as those of discount or par bonds.

Keep in mind that while premium bonds are attractive to you because of their higher interest rate, they are unattractive to bond issuers for the same reason. In fact, when market interest rates fall, some issuers may try to redeem (“call”) these bonds so that they can issue new ones at the lower rates. Obviously, if your premium bond were to be called, your cash flow might take a hit. That’s why, when investing in premium bonds, you might want to look for those that have at least limited call protection—in other words, they can’t be redeemed for a certain number of years.

Your portfolio should comprise a number of different investments designed to work together to meet your long-term financial goals.  So give premium bonds some consideration as part of a well-diversified portfolio. Before investing in bonds you should understand the risks involved, including interest rate risk, credit risk and market risk.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.