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One of the key tenets of building a strong portfolio is diversification—investing in different types of assets in order to mitigate risk and see steady long-term growth.

Besides stocks, bonds are a popular asset class which is considered one of the most secure investments one can make. When the stock market is headed for a storm, the bond market can act as a safe haven. Although people talk about stocks a lot more, the bond market is actually quite a bit larger. In 2020 the market cap of the global bond market was about $160 trillion, while the market cap of the stock market was $95 trillion.

The bond market has a long history. The first bonds were issued in the late 1600s by the Bank of England to help raise funds to fight a war against France. Since then, the global bond market has continued to grow and flourish.

So, what exactly is a bond and how does the bond market work?

Why the Bond Market Exists

Just as individuals need to take out loans in order to buy a home or pay for other expenses, governments, cities, and companies also need to borrow money. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time.

Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but individuals are able to lend them a small amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can get better interest rates with bonds.

Bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds.

Recommended: How Do Bonds Work?

For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10 year period, and will pay back the $10,000 at the end of the 10 years.

Bonds are generally issued when a government or corporation needs money for a specific purpose, such as making capital improvements or acquiring another business.

Primary vs Secondary Bond Markets

Bonds are sold in two different markets: the primary market and the secondary market. Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market. One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.

Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating, (more on that below). Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity.

Differences in Bonds

Bond terms and features vary depending on the type and who issues them. The main types of bonds are:

US Treasury Bills

These government-issued short-term bonds are the safest, but pay the least interest. The sale of treasuries funds all government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Longer-Term Treasury Bills

Bonds such as the 10-year note are the next safest option and pay a slightly higher interest rate.

Treasury Inflation Protected Securities (TIPS)

These bonds specifically protect against inflation, so they pay out a higher interest rate than the rate of inflation.

Municipal Bonds

Also known as muni bonds, these bonds are issued by cities and towns. They are somewhat riskier than treasury bills but offer higher returns. Muni bonds are exempt from federal taxes, and often state taxes as well.

Agency Bonds

Agency bonds are sold to fund federal agriculture, education, and mortgage lending programs. They are sold by Government Sponsored Enterprise (GSE) including Freddie Mac and Fannie Mae.

Corporate Bonds

The riskiest bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, and companies always have some risk of failure. The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.

Junk Bonds

Corporate bonds with the highest risk and highest potential return are called junk bonds or high yield bonds. All bonds get rated from a high of AAA down to junk bonds—more on bond ratings below.

Convertible Bonds

Corporate bonds that can be converted into stock at certain times throughout the term of the bond.

Mortgage-Backed Bonds

These bonds consist of pooled mortgages on real estate.

Foreign Bonds

Similar to US bonds, investors can also purchase bonds issued in other countries. These carry the additional risk of currency fluctuations.

Emerging Market Bonds

Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth but can also be riskier than investing in developed market economies.

Zero Coupon Bonds

Zero coupon bonds don’t pay interest, but are sold at a great discount. Some bonds get transformed into zero coupon bonds, while others start out as zero coupon bonds. Investors earn a profit when the bond reaches maturity because it will have increased in value, and they receive the face value of the bond at the maturity date.

Bond Funds

Investors can also buy into bond funds or bond ETFs, which are groups of different types of bonds collected into a single fund. There are bond funds that group together corporate bonds, junk bonds, and other types of bonds. These funds are managed by a fund manager. Bond funds are safer than individual bonds, since they diversify money into many different bonds.

Bond Indices

Similar to a stock index, there are bond indices that track the performance of groups of bonds. Examples of bond indices include the Merrill Lynch Domestic Master, the Citigroup US Broad Investment-Grade Bond Index, and the Barclays Capital Aggregate Bond Index.

What to Look at When Choosing Bonds

When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Stock shares themselves tend to be pretty similar. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.

The main features to look at when selecting bonds are:

Maturity

The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date. Bond maturity dates fall into three categories:

•   Short term: Bonds that mature within 1-3 years.
•   Medium-term: Bonds that mature around ten years.
•   Long-term: These bonds could take up to 30 years to mature.

Secured vs. Unsecured

Secured bonds promise that specific assets will be transferred to bondholders if the corporation is unable to repay the bond loan. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral.

Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. Both have their benefits and disadvantages, so it is a good idea to understand the difference between secured and unsecured bonds.

Yield

This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield fluctuates since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:

•   Yield to Maturity (YTM): YTM is the most commonly used yield measurement. It refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.
•   Current Yield: This calculation can help bondholders compare the return they are getting on a bond to the dividend return they receive from a stock. It looks at the bond’s current market price and the amount of interest earned on that bond.
•   Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t entirely accurate.
•   Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.
•   Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.

Price

This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for. Bond prices change as market interest rates change, along with other factors.

Recommended: What Is Bond Valuation and How Do You Calculate It?

Rating

As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.

Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.

Bond Market Terminology

When buying bonds, there are several terms which investors may not be familiar with. Some of the key terms to know include:

•   Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”
•   Coupon: This is the fixed dollar amount paid to investors. For example, if an investor buys a $1000 bond with a 3% interest rate, and interest gets paid out annually, the coupon rate is $30/year.
•   Face Value: Also referred to as “par,” this is the price of the bond when it reaches maturity. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”
•   Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.
•   Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.

The Bond Market and Stocks

Although there is no direct correlation between the bond market and the stock market, the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.

When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.

How to Make Money on Bonds

While the most obvious way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.

As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.

There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.

Advantages of Bonds

There are several reasons that bonds are a good investment, and they have some advantages over stocks and other assets.

•   Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.
•   Security: Bonds are considered to be a much safer investment than stocks. Although they offer lower interest rates than most stocks, they don’t have the volatility and risk.
•   Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.
•   Diversification: Bonds can be a great addition to an investment portfolio because they provide diversification away from stocks. Building a diversified portfolio is key to long-term growth.
•   Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.
Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and make a profit.

Disadvantages of Bonds

Although there are many upsides to investing in bonds, they also have some risks and downsides. Like any investment, it’s important to do research before buying.

•   Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash isn’t available for use for a long period of time.
Bond Issuer Default and Credit Risk: Bonds are fairly secure, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.
•   Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see greater returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.
•   Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.
•   Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.
•   Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.
•   Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.

How to Buy Bonds

Bonds differ from stocks in that they aren’t traded publicly. Investors must go through a broker to purchase most bonds, or they can buy US Treasury bonds directly from the government.

Brokers can sell bonds at any price, so it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.

As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.

Get Started Buying Bonds

For those looking to start investing in bonds, stocks, and other assets, there are many great tools available to help. One easy way to start buying into the bond market is using SoFi Invest’s® online investment tools. SoFi has an easy-to-use app investors can use to buy and sell bond funds with a few clicks of a button and keep track of their favorite bond funds and stocks, research specific assets, and set personalized financial goals.

Buying into bond funds is a good way for investors to gain exposure to a diversified portfolio of bonds, rather than going through the complex process of choosing individual bonds.

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Money problems are pretty common. In fact, 73% of Americans say finances are their top source of stress in life. So if you are feeling the pinch and worrying, you are not alone.

But that doesn’t mean you should live with the anxiety that a mountain of debt or low credit score can bring.
Here, you’ll learn about the most common financial issues you may face, how to avoid money problems, and how to resolve them if and when they strike.

Why Are Money Problems Common?

There are many factors that contribute to money problems. Depending on your situation, you might be dealing with, among other factors:

•  A lower income

•  A higher cost of living

•  Student loan debt

•  A medical or other emergency

•  Overspending (perhaps due to compulsive shopping)

•  Inflation

•  A job layoff

7 Common Money Issues

Financial challenges can happen to anyone — whether you are younger or older, rich or living paycheck to paycheck. Here are some of the most common money issues that people come up against.

1. High Credit Card Debt

Credit cards can be a useful tool for disciplined consumers who are trying to build good credit. And there are several perks to paying with a card instead of cash, including convenience, purchase protections, and rewards programs.

But many Americans aren’t able to pay off their account balance every month. According to U.S. Census Bureau and Federal Reserve Bank of New York data, the average household carries a whopping $7,951 in credit card debt.

Thanks to high interest rates, items you charge on a credit card and don’t pay off right away end up costing quite a bit more. As of spring of 2023, the average credit card rate topped 20%.

The interest you’re charged on a credit card also compounds, which means interest is calculated not only on the principal amount owed but also the accumulated interest from previous pay periods.

While this kind of compounding is a positive thing for compound-interest savings accounts, it can be a real issue with your plastic. It means a credit card balance can grow exponentially, even if you pay the minimum every month. Add in late charges and the possibility that the interest rate could be increased on an overdue account, and it’s easy to see how consumers get into trouble.

2. A Low Credit Score

Carrying too much debt or failing to make credit card or loan payments on time may result in a lower credit score.
A low credit score can make it harder to get a loan, such as a mortgage or a credit card. And even if an application is approved, the interest rate the lender offers may be higher than what’s available to borrowers with better scores. That higher interest rate can make it harder to make payments and keep up with other bills, which can, in turn, further hurt your credit score.

A low credit score can also negatively impact your ability to get a job or rent an apartment. And, it can take years before negative factors like late payments, defaults, and collections are removed from credit reports.

3. Not Having an Emergency Fund

Setting money aside in an emergency fund may seem like a luxury for those who are struggling to meet everyday expenses. But a solid savings buffer can actually be even more important if you’re living on a tight budget.

Without an emergency fund, any unexpected expense that comes along — whether it’s a high medical bill, a car or home repair, or a temporary job loss – can throw you way off balance.

As a result, you might need to use high-interest credit cards, retirement savings (which can trigger penalty charges), or other options that can add even more stress to a challenging situation.

A solid contingency fund that contains at least three to six months’ worth of living expenses can be an essential component of financial stability.

4. Spending More Than You Earn

Picking up a morning latte and grabbing lunch out may not seem like it could make or break your bottom line. But just $25 per week spent eating out will cost you $1,300 per year, which is money that could go toward an extra loan payment or a few extra car payments.

If you tend to make spending decisions on the fly (without any type of budget or financial plan in mind), it can be easy to blow through more money than you actually earn, and much harder to achieve your financial goals.

While the causes of overspending are varied, the habit is one of the most common reasons why people get caught in the debt trap. If you don’t have the cash to cover your expenses, you may rely on credit cards to get you through.

Once you start paying interest on your credit card balance, your monthly expenses go up. This can make it even harder to live within your means and, as a result, lead to more debt.

5. Facing Foreclosure

State foreclosure rates vary, but regardless of where you live, it can be a major concern for struggling homeowners, especially in tough economic times.

People can end up in foreclosure for any number of reasons, including financial mismanagement (buying too much house or choosing a loan payment they can’t afford), or uncontrollable events (such as a job loss or expensive medical condition).

The process is typically slow, but it can be daunting to imagine having to move, especially if it means taking children out of a school or neighborhood they love. And there can be long-lasting financial consequences, as well.

A foreclosure can have a significant effect on a credit score, and it can stay on a person’s credit record for years.

6. Student Debt

While getting a college degree can improve your earning potential, the cost of getting that degree continues to skyrocket. And so has student loan debt.

Recent statistics reveal that the average student has $37,338 in debt due to educational loans. As students leave college and enter the workforce, paying back that money can be a major challenge. Student loan burdens can lead to postponing certain milestones, including homebuying or having children, and saving for retirement.

Recommended: Average Student Loan Debt: Who Owes the Most?

7. Not Saving Enough for Retirement

According to a recent survey, one in four Americans has no retirement savings. Zip, nada. While having no money in the bank for later life can make some people feel like, “Why even bother trying to say,” know that financial advisors stress that saving something is better than nothing.

Thanks to the magic of compounding interest (when the interest earned on your money gets reinvested and earns interest of its own), even putting just a small percent of your paycheck into a 401K or IRA each month can add up over time.

Recommended: How to Manage Your Money Better

Money Problem Solving

If you recognize that you have money problems brewing or in full force, here are some steps to solve the problem:

Identify the Issue

Though it may be tempting to hide from what is going on, digging in and exploring where your money is going (or isn’t going) is an important move. Is your credit card debt feeling insurmountable? Are your housing and food costs rising too steeply? Did a job loss or medical bill force you into a difficult financial position?

Figure out and face the facts so you can move forward.

Develop and Implement a Plan

Once you know the source (or sources) of your money stress, you are in a position to take action. In a moment, you’ll learn some important ways to take control of financial issues. These include budgeting and paying down debt.

But other specific moves may suit your situation, such as debt consolidation or refinancing student loans.

Seek Help

If despite digging into your money issues, you are feeling unclear of how to proceed or as if there isn’t a feasible solution, reach out for help. There are an array of professionals who might be appropriate, from a certified financial planner (CPA) to a low- or no-cost debt counselor.

How to Cope with Money Issues

If you’re dealing with money problems (or hoping to avoid any future setbacks), here are some money management strategies you may want to put into place.

Setting a Budget

People tend to cringe at the word “budget” because it sounds like work, but having a budget in place can help simplify your finances and improve your money mindset.

To create a monthly budget, you simply need to gather up the last several months of financial statements and receipts and then use them to figure out how much you’re bringing in (after taxes) each month, as well as how much you are spending on average each month.

If the latter exceeds the former, or is so close there’s nothing left over for saving, you may want to drill down deeper.

To see exactly where your money is going you may need to track your expenses for a month or two and then determine exactly how much is going towards nonessential (or discretionary) purchases, where you may be able to cut back.

You may also want to consider adopting the 50-30-20 budget rule. With this type of budget, half your take-home income goes towards needs (or essential expenses), 30 percent goes towards wants (nonessentials), and 20 percent goes towards your financial goals–such as debt repayment beyond the minimum, building an emergency fund, and saving for a home or retirement.

Knocking Down Debt

Reducing debt may seem like a tall mountain to climb, but using a systematic approach can help make the process more manageable.

One method you might consider is the snowball method. This involves paying as much as you can each month toward your smallest balance while making the minimum payment on all your other debts so your accounts remain in good standing. Once you’ve paid off that smallest debt, you move on to the new smallest balance and continue this process until you’ve paid off all your accounts.

Another approach you may want to consider is the avalanche method. With this strategy, you start by paying as much as possible toward the debt with the highest interest rate, while making minimum payments on all the others. Once that debt is paid off, you move to the balance with the next-highest interest rate, and so on.

As briefly noted above, debt consolidation is an option as well, perhaps with a personal loan or a student loan refinance.

The Takeaway

It’s common to face money issues throughout your life, particularly when you are just starting out. Some of the most common include overspending, being burdened by debt, not having a financial cushion for emergencies, and not putting enough away for retirement.

Whatever financial challenges you are facing, you may want to clearly assess the issue and then come up with a spending, saving, and debt repayment plan that can help you get back onto solid ground.

Need some help? If you’re looking to keep better track of your spending and saving, a SoFi Checking and Savings high interest bank account may be a good option.

You can use the SoFi app to track your weekly spending and see how you’re doing with your budget. You can use the Vaults feature to earmark the cash in your account for different goals.

FAQ

What are common money problems?

Common money problems include high-interest credit card debt, lower income, student loan debt, a low credit score, and overspending.

What do people struggle with most financially?

What people struggle with financially will vary from person to person, but debt, inflation, high cost of living, and lack of emergency-fund and retirement savings are common issues.

What are 4 common investment mistakes?

Four common investment mistakes include not establishing a long-term plan, letting emotion guide your decisions, attempting to time the market, and flying to diversify your portfolio.

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Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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