Personal Finance

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question. 1. Difficulty estimating freelance income 2. Graduation gift 3. Never wanting retirement 4. Why buy a premium car? 5. Prenupital agreement 6. Road trip dining 7. Low interest and minimum payments 8. Does college choice matter? 9. Interest rate first? 10. Student loan question For us, May often means graduations, which means going to a ceremony and watching young people celebrate the end of one chapter in their life and the start of another, one that will often go in a very different direction than they expect. Most of the time, when lives reach a crossroads, we don’t see the opportunity to shift paths until the opportunity is gone. Graduation is one of those chances to shift directions where the opportunity sits right there in front of us. There are moments when I wish I could find myself at that kind of crossroads in life again, with that many open highways in front of me. There are so many different directions to choose from. Q1: Difficulty estimating freelance income I have a full time job but I also do some freelancing gigs on the side. They’re kind of consistent – I probably do fifteen a year – but they’re really unpredictable in terms of pay and in terms of frequency. I might do five in a month and then do nothing for half a year. Anyway, I’m supposed to pay estimated taxes on this income but I have a hard time estimating how much I’m making a year. How can I do this? - Roger It’s pretty easy. Just figure out how much you’d owe in income taxes on the amount you’ve earned in the last three months, then pay that. Just repeat that pattern each time you have to pay estimated taxes. It’s pretty much impossible to do this perfectly because of uncertainty in your income for the rest of the year, but the IRS actually gives quite a bit of leeway in doing this provided you’re making a reasonable attempt at doing so. Not paying those quarterly estimates will do nothing more than ensure that you have to pay extra fees and interest when you do file your taxes, so your best approach is to just give it your best possible shot. Q2: Graduation gift It seems so meaningless to put $20 inside of a card and give it to a graduate. What does that $20 even mean? They forget about it before the ink is dry on the thank you note. - Barry If you don’t feel as though your gift has meaning, seek out something that does have meaning. There are many, many things you can give as a graduation gift. It does not have to be cash. If you want a gift to have meaning, the best route is to put some serious thought into the gift, pick something that would actually mean something to the recipient, and include a handwritten note explaining it. Virtually anyone with a thoughtful bone in their body would appreciate that type of thoughtful gift. The challenge is that it doesn’t come ready-made. It requires thought and effort on your part, which is what creates the meaningfulness of the gift. Q3: Never wanting retirement I love my job and I fully intend to keep doing it until I can no longer do it. If I am not functionally capable of doing anything of value, I don’t want to live. I know enough of myself to know that I would quickly become massively depressed and would probably not live much longer beyond that point as my motivation to thrive would be gone. I don’t know why I would ever save for retirement. Why should I be socking away money for that situation? - Adam Picture this scenario: you’re sixty eight and your company decides that they no longer require your services. They give you a retirement party and a golden watch. What do you do then? You’re still of able body and mind but your employment window is likely closed. How do you make it? If you save fo

My friend Helen introduced me to Mystery Shopping about two years ago. I had heard about it, and was very curious (if not a little skeptical) about its potential in my money-saving toolbox. She mentioned in a conversation that she had not paid for an oil change in over three years. Boy did that pique my interest! After conducting two oil change shops and being fully reimbursed for the oil changes that I needed for my car, I was convinced that I had uncovered a small goldmine. Reasons to Consider Mystery Shopping I took a break from mystery shopping after completing these two assignments. That is, until something very interesting came across my inbox. While completing this glamorous one (more to come below), I took the time to think about reasons why you might want to give mystery shopping a shot. Earn Extra Cash to Supplement Your Budget While you will not become rich off of my level of mystery shopping (think fast food shops and oil changes), the extra income can certainly supplement parts of your budget. A good way to look at it is perhaps sign up for assignments and use the cash or experience towards a certain goal. For example, sign onto additional shops around the holidays in order to purchase gifts for others. You could save on food costs by only eating out when you get a restaurant/fast food assignment, or mystery shopping could help you to afford some wonderful dates for with your significant other. Experience Something New In my inbox I receive lots of emails from the mystery company I am signed up for (Intelli-Shop). Most are for fast food restaurants, car dealerships, and an occasional insurance company. Don’t get me wrong, getting a meal for free is nice and all, but you do need to write up a report afterwards and so I haven’t found all of these types of shops to be lucrative or even worth it at times (though worth it when I need an oil change!). Even with two past scores of 8 out of possible 10 for my past efforts, I have rarely seen an interesting or glamorous assignment like those advertised. Until now, that is. Last weekend, I snagged an assignment that would ensure a great date night with my husband completely for free: an evening at a racetrack. You might remember I mentioned this mystery shopping assignment when I talked about it in Do You Have to Pay Tax on Gambling Winnings? Not only did this shop include the general admission, valet parking, and three bets, but it also included a buffet dinner for two and two alcoholic beverages. What a deal! On top of the reimbursements, I was paid $60 for my time. Because I helped the company out in a pinch (two of the scheduled people had backed out last minute), I was given a “hero” status in my profile. This means my chances of getting really cool assignments in the future are higher than before. It was a win-win-win situation! Help Fulfill a Shopping Addiction Void If you have a shopping addiction or spend too much during the month, then mystery shopping could help to fill the void while offering reimbursable items. Instead of spending your own money, you can spend a company’s money (though of course you need to cover the cost upfront). You might be able to find a shop that you were wanting to go to anyway, or a type of assignment where you get to purchase and item you had needed/wanted to buy anyway (word of warning: some shops make you take the product back as part of the experience). Who knows, perhaps writing the reports out will give you enough work to do that you will go out shopping less. Get You Out of the House Perhaps you don’t have much money in your budget for entertainment. If you are home most of the day, or on weekends, then you might like a good excuse to leave the house. Mystery shopping can certainly provide this for you. You will be on an assignment, focused, yet able to enjoy whatever venue you were given a free ticket to, or whatever meal you purchased (though reimbursable, so you have to pay upfront). Some mystery shops you can even take a frie

When you lose your job, the first thing you need to do is update your resume. While it’s better if you update your resume periodically, even during your employment, sometimes a job loss catches you by surprise and you aren’t ready. If you are trying to figure out how to best update your resume, you’ll want to do what you can to take advantage of free tools that can help you create a resume that is more likely to help you get a job: Workforce Services Find out where your state’s workforce services office is in your town. Most states have some sort of organization with a mandate to help the unemployed find work. Locate an office, and then go take advantage of the tools available. Most workforce services offices have workers who can help you update your resume – or create a new one. These tools are at your disposal, and you don’t have to pay for them out of pocket. Attend workshops and get pointers, and you can tailor your resume. Free Resume Builders There are also a number of free resume builders online. These are sites that help you put your qualifications into a resume format that is easy to read. The prompts provided can help you organize your thoughts and your accomplishments in a way that highlights the best points. Here are some of the free resume builders you can use (some of them have additional premium tools and services that you can purchase on top of the free basics): LinkedIn: Using the helpful prompts from LinkedIn, you can put together a professional resume. Then, if you want a copy of it, it’s possible to “export to PDF.”  JobSpice: Spice up your LinkedIn profile with this resume builder. This site will import your LinkedIn profile data and help you plug it in to various templates. Pongo: Get help putting together a resume with one of the first online resume building services. You can choose your template, fill in your basic information, and then share information about your history to generate a resume. You get plenty of tips throughout to help you create a professional and attractive resume. CV Maker: You can use this fill-in-the-blanks site to help you get going. It’s also customizable and available in 17 languages. You can easily move sections around, and then export to three different formats. Resume.com: This website allows you to build your resume, and then send links of your personalized resume to potential employers. You can also export a copy to PDF or DOC in order to print it out. LiveCareer: Use this site to build your resume step-by-step. You can import a resume you’ve already made to get started. There are several templates to choose from, and you can customize the layout of the templates to reflect your own aesthetic. There are five different export options. With a little looking around, it’s possible to find plenty of free resume builders. There is no reason to just use a template for a guide when you can fill in a few forms and have a resume generated on your behalf. Job Search Websites Most of the major job search websites, including Monster, CareerBuilder, Indeed, and SimplyHired all have a way for you to save a profile. Your profile includes your qualifications and other information that goes on a resume. You can usually use these free services to create a standard resume that can be sent along with your job application. These sites make it a little easier to apply for jobs, since everything is completed in one package. What’s your favorite resume tool? Leave a comment! The post Free Resume Tools for the Unemployed appeared first on Money Smart Life.

All across the personal finance blogosphere, I hear people using 7% in their retirement calculation, or if someone is feeling really greedy, 8%. They say that this is the average after-tax rate our investments earn over a long period of time. But guess what? We don’t have to use that 7% for every calculation. It’s sort of arbitrary and while it may have been useful as a baseline to many, I think we need to increase that by a percentage point or two for future calculations. We can’t predict the performance of our investments over the next 1, 5, 10, or 20 years. But we can use educated guesses and some historical data to estimate what the most likely scenarios will be. For most young people like me, we have 30-40 years until we retire and having even a vague idea of what our investments will do over a long period of time is helpful in planning. I choose not to believe in that 7% number, for a few reasons: The 7% number comes not from standard market returns, which over a 30 year period averages between 9% and 10% annually (check out 25 year averages here). As a conservative estimate, taxes reduce the effective rate to about 7% after taxes. However, young people who start saving and use that long-term number should have savings in a Roth IRA, which allows money to grow tax free, so that pre-tax index number of 9-10% is actually more relevant in that case. Taxes are currently on the low end historically, and this is true of long-term capitals gains rates as well. If 7% was derived when taxes were higher (and more uncertain, the current low tax rates have recently been made permanent), it follows that a smaller percentage of those average earnings would go to taxes. Not all investments track the market index and technology has allowed for new, creative investment vehicles. I have been using Lending Club for part of my investments to the tune of a very consistent 11% interest rate (and the rate of return with peer-to-peer lending has been very consistent overall, even through a recession). Even with taxes taken out (I invest in a Roth IRA for a double win), there are new investment vehicles that may help us boost that number. Heck, my investments in blogs is well over 500% (thought it’s not nearly as scalable), so while 9-10% may be average, who’s to say it can’t be even higher?. Sure, people want to be careful when making projections about returns over long-term periods of time so that they don’t run out of money. That’s totally understandable and being on the conservative side when making predictions about retirement, is probably a good idea. It’s far better to be careful and not run out of money in your 80s or early 90s than to be over-confident in our estimates and risk a crisis when there’s not enough savings to last. 7% may have been the old number to use for every calculation, but the rules have changed. I’m not suggesting we use 10% in every calculation, but I think 8-9% is still a safe number to use for planning, and as we know, even small increases in interest rates will have colossal effects on savings over a long period of time. Can We Expect 9% As The New Average Market Return? is a post from Sweating The Big Stuff: Spending Wisely

I’ve posted Entry #142 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Bad Retirement Studies Are Like Dirty Restrooms — They Are a Sign of More Bad Stuff That You Cannot See. Juicy Excerpt: Most of the experts use the claim that their strategies are backed by research as a marketing gimmick. it sounds good to say that advice is rooted in research. It makes investors feel comfortable to hear those kinds of promises. But honoring the promises would tie the hands of the experts. When you take research seriously, there are things you cannot say that from a marketing standpoint you might very much want to say. The 10-year delay in correction of the retirement studies shows us that, when there is a conflict between marketing imperatives and the need to be true to the research, most investing professionals put marketing concerns first, second, third and fourth. The reality is that today’s experts are not taking valuations into consideration in ANY of their calculations. It’s not just the safe withdrawal rate studies that present a problem. The only reason why the problem became visible in the retirement area is that the retirement studies require identification of a worst-case scenario, a single point on the spectrum of possible return scenarios. When you have one number to look at, it is possible to say whether the number is accurate or not. Once we saw that the retirement numbers were not accurate, we should have reacted not by minimizing the problem but by wondering whether it might be indicative of a much deeper and broader problem than the one that had became obvious. I suspect that the reason why we have feigned unconcern for some time is that on some level of consciousness we suspect how deep the problem goes and we are worried about what it will mean to come to terms with it.

I happened across another personal finance blog article over the last few weeks that left me scratching my head and then doing some deep reflection. I won’t mention specifics on who the blogger was to save him additional embarrassment (and to save you from ready misinformed personal finance advice), but if you read him, you’ll probably know who I am talking about. This blogger bragged to his readers about buying a new car. According to him, he had paid his dues and gosh darn it, it was time to splurge a little because he deserved it! Now, buying a new car can be excusable. The used car market has been ridiculously competitive since the Great Recession started – prices are inflated everywhere and from my personal experience – just about any decent fuel-efficient car manufactured in the last 5 years that has a clean title is gone within a day of it hitting Craigslist. BUT, if you’re guying to buy new, you have to do it the right way. And if you’re a personal finance blogger who buys a new car and be transparent with his/her audience, you better REALLY do it the right way. And that means all of the following: Find a cheap, fuel-efficient model. Get just the base features (which are plenty generous these days). Time it right with discounts. Pay for the purchase with cash or 0% financing. Negotiate like your life depends on it, BEFORE you ever set foot in a dealership. And even more when you get there. This personal finance blogger did none of this. He bought a not very efficient mid-sized car that is overpriced compared to perfectly legit alternatives. Every feature imaginable was added – moonroof, heated front seats, 360-watt stereo with subwoofer, rear camera – top trim level. Judging by the make and model and every luxury feature he listed, my estimate that it was priced to about $35K. Twice what a compact base model costs. No discounts. He financed even when he had the cash available to pay. He didn’t negotiate ahead of visiting dealerships (and when you choose every feature, the dealers know you’re a sucker who’s willing to pay top dollar). Throughout the entire post and ensuing comments, he made weak point after weak point defending himself on why the purchase was justified and why he went about it the way he did. But what was most interesting to me were the ensuing comments. Probably about 25% of the readers were cheerleaders: “Congrats! You deserve to splurge every now and then! (and you just made it excusable for me to do the same, yay!)” But the other 75% took a drastically different tone… Personal Finance is All About Values I’m not sure why the blogger highlighted the purchase to his audience. I think maybe it was to demonstrate transparency. Personal finance bloggers are humans too – and sometimes we do make mistakes when it comes to spending. And that’s fine. His honesty can be appreciated, I suppose, but he did ALL THE WRONG THINGS in making the purchase and then didn’t own up to his mistakes. So, at best, he was demonstrating his personal finance incompetency, in a transparent way. At worst, he was demonstrating how poor purchase decisions are all justifiable – which is Cardinal sin #1 in personal finance. Accusations from readers of being a poor example to others followed. I bring this up, not to pick on the guy (whose blog has actually been rated as one of the best personal finance blogs) – but rather, because it was interesting to watch the the psychology play out. Why were his followers so angry? After much deep thought, I determined the answer was this: values. People want to connect with and follow those who share their values. And personal finance related decisions reflect your values on: materialism and consumption the environment how you value family and friends how you spend your time effort and creativity responsibility No matter how many dozens or hundreds of articles this blogge

A reader writes in, asking: “Is it possible to find out exactly what is in a mutual fund? I’m looking for something more complete than the “largest holdings” lists which I can see on Vanguard’s website.” Mutual funds are required by the SEC to disclose a complete list of their holdings on a quarterly basis. SEC Form N-Q is used to disclose holdings as of the end of the first and third quarters of the fiscal year, and Form N-CSR is used for the end of the second and fourth quarters. You can look up either of these forms in the SEC EDGAR database. For example, here’s the Form N-CSR for Vanguard’s Total Stock Market Index Fund (as well as several other Vanguard funds) as of December 31, 2012. Because these disclosures are only done on a quarterly basis — and because the funds have a 60-day window during which they can make the filing — the information provided in these disclosures is not especially timely. As a result, these disclosures will be of little use for certain purposes (e.g., trying to mimic the strategy of an actively managed fund). But they would be useful, for instance, to somebody who is trying to figure out whether a given index fund holds shares a particular company (or group of companies) to which they have ethical or religious objections. Finding a Fund’s Form N-CSR or Form N-Q While it only takes a few seconds to look up a fund’s N-CSR or N-Q once you know where you’re going, getting there for the first time isn’t exactly intuitive — at least it wasn’t for me. So let’s quickly walk through it step by step. Go to the SEC EDGAR homepage. Click the link for “search for filings.” Click the link to search by ticker symbol or fund name, and on the next page enter the ticker of the fund in question and click “find companies.” On the next page, scroll until you find the most recent thing in the “filings” column labeled either “N-CSR” or “N-Q.” Click the “documents” button next to that listing. On the next page, find “N-CSR” or “N-Q” in the “type” column and click the red link in the corresponding row. (The link itself could be named anything.) Here’s a screenshot of what you’re looking for (click to enlarge): Naturally, most funds — especially broadly diversified index funds — have a heck of a lot of holdings, so browsing the list in search of a specific stock or bond will take an exceedingly long time. A much faster approach is to use “control + F” to search the page for a specific word or phrase. What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book: Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less Click here to see it on Amazon. Treasury Circular 230 Notice: Any U.S. tax advice on this blog is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed on this blog. Disclaimer: Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reade

“I’m BOOOOORED!” “Mom! What can we do?” “Can we go to Disney World?” If you’ve got kids at home, you’ve likely heard that once or twice during the summer. But you don’t have to pay for expensive summer camps or vacations to keep them entertained. Welcome summer and all of its glories with your own summer camp. This won’t be easy — banish that thought from your mind. But, the kids will LOVE you for it. And you’ll re-form those family bonds that were stretched so thin during the long school season. What you’ll need for your successful summer camp: 1. A notebook This will become your best friend this summer. You’ll keep your plans, ideas, and even results in here. 2. A plan Sit now and start planning your activities. By starting early, you’re not only making sure you have enough excitement ready; you’ll have time to stock up on craft supplies without paying (toilet paper and paper towel rolls), or without paying for them all at once (markers, glue, etc). 3. A theme If you want to make this da bomb for the kids, involve them in the planning. Let them help you come up with a theme for your summer camp. One year, we did Flylady’s “GonnaWannaFly” summer camp. It was truly amazing to watch the kids get excited about cleaning house! 4. Pinterest There are very few places as awesome at turning out stellar kid-friendly science experiments, activities, and ideas than Pinterest. Set up a board and title it “Summer Camp.” Voila! You’ve JUST generated your own vision board of fun! Search for “kids activities,” “summer camp,” “homeschool science,” and anything else that pertains to your theme. 5. Supplies Hide them away in a closet, and keep track of what you’ve bought in your notebook. Buy them in small quantities each week, so it won’t feel as though you’ve spent a small fortune on craft stuff. (Although my wife does adore raiding the craft and school supply section at Target — I guess it must be more fun buying in bulk!) 6. Banners Let the kids help you make some creative and colorful banners. Keep them in the kitchen, so you can be reminded of your ongoing summer camp fun! 7. A schedule Set the schedule — and STICK to it. Don’t get sidetracked. The key is planning a few fun activities, some quiet time, and a few unstructured moments each day. 8. Hidden chores Home chores can be figured into those “fun” activities (think: mopping the floor with bathing suits and socks, or races to put away laundry). Our sample schedule: Breakfast, unstructured play time for half an hour, fun activity #1, lunch, fun activity #2, quiet time, fun activity #3, unstructured playtime, dinner, next day prep. Of course, to make this schedule work, each day’s “fun activity” is specifically planned, with chores hidden within and routines in place to make cleaning easy. 9. A system of fairness If you have more than one child, you’ll need a hard and fast system that ensures no one goes first more than the others, or that each child gets a turn being the “leader” of the game. At our house, we have what we call the “Shell Spoon” (you know, the old sugar dish spoons that came with your grandma’s good china). The Shell Spoon is rotated. The eldest had the first Shell Spoon Day, the second had it the next, and the third got it last (this is why birth order screws us all up, but I digress). Anyway, we’ve rotated this spoon for about three years. The Shell Spoon person goes first, sits in a special chair, takes their shower first, helps set the table, etc. And it (usually) prevents a lot of headache because there’s no “You went first last time!” stuff, and we don’t have to remember anything except whose Shell Spoon Day it is. 10. Flexibility Sometimes the plan won’t work. Somebody gets up on the wrong side of the bed, or doesn’t like the activity that was planned. Whatever. You must be ready to either change activities, handle the disruption with a smile and love, or just chunk the day together. Adopt one rule: never skip summer camp more than one day

This article was originally published on Cash Money Life | Personal Finance, Investing, & Career at 4 Creative Ways to Be Frugal.I’m not really into frugal living. However, there are times when I want to save a little money – or at least get the best value for my dollar. While I don’t really consider myself overly frugal, I am careful not to spend money on things that aren’t important to me. If I think it’s important, or interesting, or enjoyable, I’m willing to spend. But, in order to have the money to spend on the things I want, it sometimes means spending less on other items. Here are some creative ways to be frugal and save money. 1. Preserve your produce. One of the biggest money leaks is in eating out for convenience. If you don’t have what you need for a meal, it can be tempting to just get takeout, or to go out to eat. You can cut back on this impulse by preserving your produce. Whether you buy produce at a farmer’s market, at the grocery store, or grow it yourself, it’s possible to preserve it. You can freeze or bottle a number of produce items. This can provide you with a quick meal idea later on. You can also use a cookbook that features six ingredients or less, or use a food substitutions bible to help you make dinner using what you already have in the house. This can save you time and money over going out to eat. 2. Change your home entertainment sources. You don’t have to throw your cable TV out the window to save money – but you can still get creative! My husband and I are in serious talks to get rid of satellite (finally!). You can get creative with your home entertainment by using streaming sources like Amazon Prime ($79 a year, instead of paying that a month), Netflix, Hulu, and more. You can also get a device like Roku to help you stream. Many recent TVs include HD tuners that allow you to get local broadcast channels in high definition. Another creative way to save money on home entertainment is to do something else. Find other activities to do instead of watching TV, whether it’s playing a game, doing a puzzle, or even just having a conversation. Anymore, doing anything other than watching TV is considered “creative.” 3. Track your credit card spending in your checking account. One way to earn more cash back, and to save money over time, is to use your cash back credit cards for most of your purchases, including utility bills. However, this only works if you pay off your bill each month. Sometimes, when you use a credit card, your spending can get out of hand. It’s difficult to keep up with the spending sometimes, and studies indicate that we spend more when we have plastic. One creative way to stay on track of your credit card spending, and avoid spending more than you intend, is to deduct the money from your checking account. That way, you know that you will have enough to pay off the credit card at the end of the month, since you will be consciously keeping track of your spending. (And the best way to save money is not to spend it in the first place!) 4. Think of your spending in different terms. If you want to curb your spending and save more money, think about your money in different terms. Some people think of an expenditure in terms of hours worked. Think of how much you earn in an hour. Then convert your spending into hours it would take to “pay off” the cost. If you make $25 an hour, and something costs $75, you have to work three hours to pay that expenditure off. Is it worth it? If it’s not, save the money rather than spend it. You can also use another price anchor. Think of something that you like to do. Maybe you get a great deal of enjoyment out of going to the movies and having popcorn. When I go to the movies, I spend about $20 for my ticket and concessions. I can use that as a price anchor. If something costs $100, I can ask myself this question: Do I want to give up five trips to the movies for

When you buy a bond, you might find that there is a sinking fund provision. So what is a sinking fund? This is an interesting measure that allows an entity to establish a fund for the purpose of ensuring that there is a way to repay the principal when it comes due.The idea behind a sinking fund is to help the bond issuer to be able to more affordably retire its debt.How a Sinking Fund WorksNormally, the sinking fund is established as a way to build up a certain degree of capital so that debt is easier to repay. The entity issuing the bond establishes the fund, and then uses money to purchase the outstanding bonds on the open market. So, instead of waiting to repay the principal when the bond reaches maturity, the issuer re-purchases the bond on the market. Now the original issuer is the bond holder, so the debt is actually retired.Another way to use a sinking fund to repurchase debt is to make use of callable bonds. These are bonds that have provisions indicating that the issuer can recall the bond at a particular time, and for a particular price. Before you invest in a bond, make sure that you double-check the terms of the bond for information on whether or not it’s callable in relation to the sinking fund. If it is, it means that you might be required to sell it back at a discount, meaning that you won’t receive as much interest.Pros and Cons of a Sinking FundFor the bond issuer (often a corporation), the sinking fund can help reduce costs and help reduce debt. The bond issue is designed to help raise capital, but it’s possible that inflows improve, and the issuer is able to repay the debt earlier. The sinking fund can make this possible. The money in a sinking fund is used to buy bonds on the open market, purchasing them back as part of the regular business of the bond market.It’s also possible for issuers that think that they will be able to repay the debt sooner to establish the fund and issue callable bonds, or bonds with sinking fund provisions. That way, they have the right to repurchase bonds at a discount and retire their debt sooner.There are also some benefits for investors. An investor can choose to purchase bonds with sinking funds in order to limit risk. A bond issuer with a sinking fund is more likely to repay all of its principal. If you are concerned about default, purchasing bonds with sinking fund options can help you avoid these problems.The main downside to buying a bond with a sinking fund provision is that you could lose some of your expected returns. You reduce the risk of losing your principal, but you might have to put up with interest rate losses as the bond issuer is allowed to buy back the bonds at a discount.Carefully consider your options before you make a decision about whether or not to purchase a bond with a sinking fund option. You need to make sure that you understand the risks as well as the rewards.The post What is a Sinking Fund? appeared first on Personal Dividends - Money+Lifestyle.Related posts:Why Building an Emergency Fund is More Important than Getting Out of DebtMutual Fund Investing with StyleInvesting in Municipal BondsWhere to Keep Your Emergency FundTIPS to Fight Inflation