If you’re a homeowner and want to cut your living expenses, consider buying Treasury bonds. Since the Federal Reserve has raised interest rates significantly in 2022, three-month Treasury bills are yielding over 3.3%, and one-year bills are over 4%. This means you could potentially cover your housing costs by investing in these bonds.
One major perk of owning a home with a fixed-rate mortgage is that your mortgage stays the same even as rents and inflation rise. Most homeowners refinanced their mortgages before rates went up in 2022. For two years, they could refinance a 30-year fixed rate for under 3%. Many people with adjustable-rate and 15-year fixed mortgages also locked in rates below 3%. In fact, 90% of mortgages have rates under 5%, with 55% under 4%. Therefore, many homeowners could live essentially rent-free by investing in Treasury bonds now.
Take my scenario for instance – in 2020, I bought a house with a 7/1 Adjustable Rate Mortgage (ARM) at 2.125%. So, I can use my cash to buy a 10-year Treasury bond yielding about 3.5% to cover my mortgage interest and earn an additional 1.4% risk-free. Let’s say my mortgage balance is $1 million and I have $200,000 in cash. By buying $200,000 worth of 10-year Treasury bonds, I could cover 20% of my mortgage balance. To completely eliminate risk, I’d have to hold the bonds until they mature.
Instead of only paying down my mortgage principal for a guaranteed 2.125% return, I’m tempted to buy 10-year Treasury bonds offering a 3.5% yield post-decline. By doing so, I can secure a 1.4% higher gross annual return if I keep the bonds until maturity. I might also profit from selling the bonds if interest rates drop.
For most mortgage-holders, it’s smart to allocate more idle cash to safe assets like Treasury bonds and I-Bonds as part of our investment strategy. Although inflation may currently offset our returns, it’s all about relative gains. Taking advantage of opportunities like buying I Bonds in bulk at high returns has been a clear win for me.
To determine the real payoff of your investments, you’ll need to calculate your taxes too. Interest from Treasury bonds is federally taxed but exempt from state and local taxes. On the other hand, mortgage interest deductions can help offset some costs. If you live in a high-tax state, like California or New York, buying Treasury bonds may be more financially appealing.
Performing these calculations with your specific tax situation in mind is crucial. Federal tax rates, bond yields, and mortgage rates all play a part in figuring out your net benefit. By comparing these rates, you can assess whether investing in Treasury bonds to live for free is a smart move for you.
Back in 2017, I sold a rental property to focus on other priorities. I reinvested a portion of the proceeds into stocks, real estate crowdfunding, and California municipal bonds to generate lower-risk, tax-free passive income. The returns were steady until the bond market downturn in 2022, underscoring the importance of proactive financial planning.
Even though low-risk investments like municipal bonds are not entirely risk-free, they can provide a predictable income stream. It’s essential to monitor your investments, especially during turbulent market conditions, to mitigate potential losses. Holding bonds until maturity is one way to safeguard your capital.
While buying Treasury bonds can help some homeowners live for free, it’s often more of a theoretical exercise due to cash constraints. Nevertheless, the idea of earning a risk-free return greater than your mortgage cost can boost financial confidence. This enhanced financial flexibility may lead to increased spending and a reduced financial burden for homeowners.
Another way to potentially live for free is through real estate investing strategies like Buy Utility, Rent Luxury (BURL). By investing in high-yield properties in affordable locations and using those returns to cover expenses in higher-cost areas, you can offset your living costs. Exploring investment options like private real estate funds can offer diversification and potentially higher returns.
For more in-depth financial insights and strategies to achieve financial independence, check out my best-selling book, "Buy This, Not That: How To Spend Your Way To Wealth And Freedom." Packed with practical advice and proven techniques, this book can empower you to make sound financial decisions and build a secure future. Remember, making informed choices is key to reaching your financial goals and living a fulfilling life.
