How To Generate Income Today
Can you generate income these days? Whether you're looking at your job or your investments, it ain't easy.
If you're employed, of course, you've got income. But apparently that income isn't going too far for a lot of folks. A recent survey by CareerBuilder claims that 71% of Americans live paycheck to paycheck. That means that they make just enough to pay the rent and eat.
Okay, so some of these people spend on more than just food and rent. Clothes and entertainment come to mind. And I'll guess that some of them really do waste their money on lots of stuff they don't need.
But even if we figure that people don't always spend their money wisely, what does it mean that so many people are living paycheck to paycheck? It means they're not saving. No savings? Living paycheck to paycheck and no savings? Not good.
So what about the rest of us who earn an income, don't live paycheck to paycheck, and manage to save some money. Pat yourself on the back. Apparently there aren't that many of us.
Now what happens if you lose your job? Well, you've got those savings. And let's say you really did sacrifice and saved up a bit. Maybe not a fortune, but more than a few thousand bucks. So you're unemployed but you've got these savings and you can maybe use some of the income you generate from your savings, right?
When I was growing up, my Dad helped me open up a bank account when I was younger and I learned to save my money and put it in the bank. And I got interest on my money. As I remember, I earned 4% or 5%. I used to check my account from time to time and it was nice to see the money grow bit by bit.
What's that? You're not getting 5%? Oh, right. Savings accounts give you around 1% or less these days. And money markets pay even less. That's not going to generate much income, is it?
So what do you do? It's a good question. Here's what lots of people are doing for income today. They're investing in bond funds. And you can get some bond funds out there paying 4% or 5%. Some might pay a little more or less.
But wait. When I earned that 5% in my savings account, I didn't worry about the principle. It was safe. I got 5%, plus I kept the principle. You don't get that deal with a bond fund. In fact, bond funds that generate 5% are kind of risky. If - or I should say when - interest starts going up, you'll lose some of your principal. Maybe a lot more than you think.
How much? Well, check out the "duration" of your fund. You'll find it on the internet. Just Google the fund. (Why bother reading those needlessly complicated prospectuses anymore when you can find most of the stuff you want using Google?) Check the "duration." If it's somewhere like where I think it will be - around 6 or 7 - then here's how you figure your risk to principle: If interest rates go up 1%, your bond fund will lose whatever that "duration" number is. So if your duration is 7, you'll lose 7%.
So if you have $100,000 in a bond fund and earn 5% for a year, that puts $5,000 in your pocket. But if interest rates go up only 1% during the year, you'll lose $7,000. Not a very good deal. You wind up losing $2,000 even though you thought you were going to get 5%. (I'm not a big fan of bond funds.)
And the thing is, billions are pouring into bond funds these days. Apparently, lots of folks are pretty impatient about getting 1% or less and figure they'll take the 5% from the bond fund and, what the heck, bonds are safe, right?
But now you know that they may not be all that safe - at least not safe the way a bank savings account is safe.
So in the end, you can generate income all right. Just be aware that you've got risk hanging out there when interest rates go up. It's not all that easy generating income these days is really the point.
If you're employed, of course, you've got income. But apparently that income isn't going too far for a lot of folks. A recent survey by CareerBuilder claims that 71% of Americans live paycheck to paycheck. That means that they make just enough to pay the rent and eat.
Okay, so some of these people spend on more than just food and rent. Clothes and entertainment come to mind. And I'll guess that some of them really do waste their money on lots of stuff they don't need.
But even if we figure that people don't always spend their money wisely, what does it mean that so many people are living paycheck to paycheck? It means they're not saving. No savings? Living paycheck to paycheck and no savings? Not good.
So what about the rest of us who earn an income, don't live paycheck to paycheck, and manage to save some money. Pat yourself on the back. Apparently there aren't that many of us.
Now what happens if you lose your job? Well, you've got those savings. And let's say you really did sacrifice and saved up a bit. Maybe not a fortune, but more than a few thousand bucks. So you're unemployed but you've got these savings and you can maybe use some of the income you generate from your savings, right?
When I was growing up, my Dad helped me open up a bank account when I was younger and I learned to save my money and put it in the bank. And I got interest on my money. As I remember, I earned 4% or 5%. I used to check my account from time to time and it was nice to see the money grow bit by bit.
What's that? You're not getting 5%? Oh, right. Savings accounts give you around 1% or less these days. And money markets pay even less. That's not going to generate much income, is it?
So what do you do? It's a good question. Here's what lots of people are doing for income today. They're investing in bond funds. And you can get some bond funds out there paying 4% or 5%. Some might pay a little more or less.
But wait. When I earned that 5% in my savings account, I didn't worry about the principle. It was safe. I got 5%, plus I kept the principle. You don't get that deal with a bond fund. In fact, bond funds that generate 5% are kind of risky. If - or I should say when - interest starts going up, you'll lose some of your principal. Maybe a lot more than you think.
How much? Well, check out the "duration" of your fund. You'll find it on the internet. Just Google the fund. (Why bother reading those needlessly complicated prospectuses anymore when you can find most of the stuff you want using Google?) Check the "duration." If it's somewhere like where I think it will be - around 6 or 7 - then here's how you figure your risk to principle: If interest rates go up 1%, your bond fund will lose whatever that "duration" number is. So if your duration is 7, you'll lose 7%.
So if you have $100,000 in a bond fund and earn 5% for a year, that puts $5,000 in your pocket. But if interest rates go up only 1% during the year, you'll lose $7,000. Not a very good deal. You wind up losing $2,000 even though you thought you were going to get 5%. (I'm not a big fan of bond funds.)
And the thing is, billions are pouring into bond funds these days. Apparently, lots of folks are pretty impatient about getting 1% or less and figure they'll take the 5% from the bond fund and, what the heck, bonds are safe, right?
But now you know that they may not be all that safe - at least not safe the way a bank savings account is safe.
So in the end, you can generate income all right. Just be aware that you've got risk hanging out there when interest rates go up. It's not all that easy generating income these days is really the point.
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