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Government Bonds

Do you find yourself scrambling to pay your bills and credit cards some months? Well, it turns out the government has the same problem. It costs a lot of money to run a country, and the government can't just hold a bake sale to pay for everything…although we think a rummage sale on the White House lawn would be pretty fun.

The government can raise taxes to pay for stuff, but that tends to get people hot under the collar (and not in a good way). Another option for the government is to issue bonds. It's a win-win: the government gets the money they need for the military, roads, and your DMV office, and in exchange you get the chance to earn money on a very secure investment.

Although countries can default on their debts, the bonds you get under the old stars and stripes are pretty risk-free (or as close to it as anything gets these days). If you invest in government bonds from other countries, though, you may be taking a bigger risk, especially if you're investing in countries teetering close to bankruptcy or nations with a lot of conflict.

Types of Government Bonds

In the U.S., there are two main types of government bonds: 

  • bonds issued by the federal government
  • municipal bonds issued by states or municipalities

Federal bonds include T-Bills, T-Notes, and T-Bonds (we think the White House might have a thing for Mr. T). T-Bills mature in less than a year, T-Notes take up to 10 years, and T-Bonds take over ten years. Technically, T-Bills aren't considered bonds at all because they're so short term, but we're lumping them in here so that you know all the government securities you can buy.

If you don't want to give any more money to the feds, you also have the option of buying municipal bonds. Also known as munis, they can be issued by states or cities. They're slightly more risky than fed bonds because cities can go bankrupt (hi, Detroit! we still love you).

Municipal bonds have a nice tax advantage, though. You don't have to pay federal tax on the returns on munis, and some states and cities sweeten the pot by making their bonds tax-free at the state level, so you can avoid taxes on your returns entirely.

Your interest on a municipal bond is generally lower than it would be on a bond that does involve taxes, but on the other hand…no taxes. It's another way to stick it to The Man. Tax-free bonds also make a lot of sense in some cases: if you have tons of money sunk into bonds, for example, it's a pretty terrific deal not to have to pay taxes on your returns.

If you want to buy government bonds, you can usually do that through your broker, bank, or financial institution. If you want to buy federal bonds, open a Legacy Treasury Direct account online.

Either way, when July 4th rolls around, you'll have another reason to be proud. Not only do you live in the U.S. of A., but the government is helping you make money.

We always knew they'd come in handy for something.

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