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How to Buy a Home With Bonds and Stocks Earnings

By Team Tomorrow
Published August 9, 2021

Is that .01% interest that you’re accruing in your savings account not “wowing” you? If you’re looking to buy a home, consider making money via savings bonds and stocks earnings instead.

In this post, we will cover:

  • What bonds are and how they work
  • What stocks are and how they work
  • How accrued interest from bonds and stocks earnings compares to your savings account

What Are Savings Bonds and How Do They Work?

You probably best remember savings bonds as that weird gift Grandpa gave you on your fifth birthday. You couldn’t play with it, wear it, or eat it, so back then it was useless to you.

However, when it doubled in value by your 25th bday, you were thrilled to cash it in.

A savings bond is a loan to the government that’s issued by the US Treasury. It’s a long term investment that’s going to accumulate money — much more money than your run-of-the-mill savings account.

There are two different kinds of savings bonds: Series EE and Series I

  • Series EE Bonds – These bonds have a fixed rate and earn interest. They also include a guaranteed return of double the value if kept for 20 years. No matter what your fixed rate may be, the bond automatically adjusts at the 20-year mark to ensure the end-value at least doubles. These bonds are perfect for long-term investments, but probably aren’t ideal for when you’re looking to buy a home.
  • Series I Bonds – The idea behind Series I bonds is they protect your money from inflation. Prices increase naturally. For instance, $10,000 in 1960 is equivalent in purchasing power to about $90,220.95 today. These bonds have a fixed rate and an inflation-adjusted rate that gets calculated twice a year.

What Are Stocks and How Do They Work?

Stocks represent equity ownership in a company and produces income via dividends and capital gains. Stocks allow everyday people to invest in some of the world’s most successful companies. In exchange, companies can use these investments to do things like raise money to fund growth and create new products.

You can make money via stocks whenever a stock price increases, and if/when the stock pays dividends.

When a stock price increases, it becomes worth more. Let’s say you buy a stock worth $10, and the price jumps to $12. If you sell it at $12, you’ve made a profit of $2 per share before taxes.

Dividends are a share of profits you get as a part owner of a company when you purchase its stock. Not all stocks pay dividends, and they’re not guaranteed. However, they’re nice to have when they show up. Companies typically pay dividends on a quarterly basis, depending on the company’s revenue.

While stocks are more volatile than savings bonds, they’re considered a great investment. The average annual stock earnings return is 10% (or 7% – 8% when adjusted for inflation).

However, these earnings are not a guarantee. Many companies go bankrupt and lose money over time. Meanwhile, other companies frequently make way more than a 10% return.

Savings Account vs Bonds vs Stocks Earnings

Here’s a story about three rich grandpas. Each grandpa invests $10,000 into their grandchild’s future (because they’re rich, and they can):

  • Grandpa #1 invests $10,000 in a savings account that accumulates .01% interest
  • Grandpa #2 invests $10,000 in a Series EE Bond
  • Grandpa #3 invests $10,000 in the stock market, where it makes the average rate of return

Here’s what each investment will look like at the end of 20 years:

Buying a Home with Stocks and Bonds.png

It’s important to note the savings account and Series EE Bonds are guaranteed income, and that Grandpa #3 could’ve lost his shorts in the stock market. However, even if Grandpa #3’s rate of return was 5% — half of the annual average — the ending amount would still be $26,532.98. That number doesn’t include dividends.

Saving Account vs Stocks Earnings to Buy a House

Let’s shorten the timeline to three years, since saving to buy a house rarely takes you 20. Since short-term bonds are difficult to calculate, we’ll compare what $10,000 turns into over five years in your savings account vs the stock market:

Buying a Home with Stocks and Bonds 2.png

In conclusion, if you want your money to make more money so that you can buy a home faster, invest in bonds and stocks.

And if you want to protect your wealth, visit Tomorrow today.

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