How to invest sustainably (in bonds)

The bond certificate for a train companyLast week, I talked about the safest, most liquid investments you can have: bank accounts and CDs. Bonds are slightly riskier but have better returns and sometimes allow you to fund very specific activities, which makes it easier to make moral investments. Bonds also encourage a long-term perspective since their value doesn’t fluctuate like stocks do. There are three major types of bonds, each with different benefitsa dn drawbacks: federal, municipal, and corporate.

A bond (or bill or note depending on how long they take to mature) is basically a loan to a company or government. You pay them a given amount and they pay you interest and then repay your loan at the end of the term. Some bonds roll the interest into the final payment while others give out occasional (usually quarterly or annual) interest payments. For example, you can put $25 into a savings bond and get $50 from the government in 15 years. Or, you can put it in a corporate bond and receive annual payments of $1 until you get your $25 back in 15 years (obviously, these numbers are totally made up).

US government bonds are some of the safest investments you can make. This lack of risk is reflected in their low returns, however. The current rate for most federal bonds range from 0.07% to 3.7% depending on the maturation date (1 month to 30 years out). Interest on government bonds is also exempt from state and local taxes (although not federal taxes), which increases the effective yield a little. Even though returns aren’t great, you know what you’re funding: the US government. Generally, the government takes a longer view than corporations but there are still some morally sticky areas, depending on your viewpoint. If you’re interested in federal bonds, you can buy them through TreasuryDirect.

Municipal bonds are similar, but sold by local governments. Usually, these bonds raise funds for a specific purpose like improving schools. Here in Bloomington, the city is considering floating a bond to buy a sports complex. To encourage people to invest, they’ve discussed how much money they’ll need to raise as well as how they plan to pay it back (savings from events they’d otherwise have to rent locations for and monthly access fees). This makes it easy to evaluate and decide whether or not it’s a sustainable purpose.

Even better, this money stays in the local economy. Interest rates are usually higher than those for federal bonds, about 1.7% to 6.8% (6 month to 30 year) right now. That’s because of slightly higher risk and difficulty finding buyers (it’s easier to sell to the entire US than to a small town). You also have to invest on the municipality’s schedule and not your own, since they don’t continuously float bonds. Many municipal bonds are tax free at all levels (federal, state, and local) but others offer no tax incentives at all.

Corporate bonds are floated by companies that need additional cash. Many large corporations use bonds to raise money for seasonal expenses or short-term capital expenses like building new factories. Like buying stock in a company, you’re funding all of the company’s activities, which can raise moral problems if the company isn’t one you believe in. Although corporate bonds are riskier than government bonds, they’re safer than stocks. If a company goes bankrupt, bond-holders are paid before stock-holders. Corporate rates range from 1.5% to 11% (2 year to 30 year) depending on the risk rating of the bond (A, AA, and AAA from reasonable risk to almost no risk).

If you buy a corporate or municipal bond, you’ll probably see numbers like the price, coupon, and maturity date. In general, all you really need to worry about is the yield-to-maturity (YTM). This incorporates all of those factors into a simple annual yield. For example, if the YTM is 3% then you know that buying a bond at $1000 will yield you $30 a year. If the bond costs $500, then you’ll only get $15 with the same YTM.

Federal bonds are a little simpler, since you pay a discount and receive face value on maturity. For example, a EE bond with a face value of $50 might cost you $25. In 30 years, you can redeem your EE bond for $50, an annual compound rate of 2.4%.

Bonds are great if you’re looking for tax exemption, low risk, regular payments, or specific projects to fund. They’re not so good if you want to invest money on a regular schedule or you want higher returns. I think that bonds are a great part of a sustainable portfolio, but since they take some work and aren’t always available, stocks have a place as well. I’ll talk more about that in my next article.

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How to invest sustainably

In the past few months, I’ve been thinking heavily about investing for retirement. I’ve never had a job with a 401(k) or retirement plan, so my retirement planning has been entirely on my shoulders. Unfortunately, for a long time that meant no retirement planning. Once my business stabilized a little and we got more important stuff (like health insurance) squared away, I decided that it was time to take my future into my own hands. I opened a Roth IRA and bought a couple of low-cost index funds. According to my research, that was the best approach for a casual investor since it represents a bet on the future of the entire market rather than on the future of a particular company.

The moral drawback is that I’m investing in companies I disagree with, like RJR and Exxon. The mechanical drawback is that our economy can’t sustain the kind of market growth we’ve seen in the past (at least, not without also causing the kind of market crash we’re seeing now). The alternative is sustainable investing.

Sustainable investing has two parts: investins in sustainable organizations and investing in a sustainable way. Sustainable organizations have both sustainable products and sustainable business practices. Obviously, drilling for oil isn’t sustainable because eventually there won’t be any more oil. Problematic business practices are often harder to figure out, but just ask yourself if it could work forever. For example, outsourcing to developing countries for cheap labor isn’t sustainable because eventually prices will increase. On the other hand, supporting a living wage is a sustainable business practice because it can be supported indefinitely (and, as Henry Ford realized, it can help create or expand a market for your product).

Investing in a sustainable way requires treating your money the same way that you’d treate any non-renewable resource. This means taking a long-term view and focusing on growth. Money primarily grows through compound interest, so you want to avoid touching your nest egg as much as possible.

As long as you like your local credit union, the easiest way to invest sustainably is to put your money into a savings account or certificate of deposit (CD). It’s not risky, which means that your principal is safe, allowing you to treat the interest as a renewable resource (think of it as tree farming). This money will also go to work in your community by supporting local businesses and individuals through bank loans.

Unfortunately, saving account and CD rates are currently at an all-time low. The best rate I can find locally is about 2.5%, which is less than inflation. Once the economy picks up, so should rates, but this means that CDs probably aren’t the best investment choice right now.

The two other big options are stocks and bonds. Although they have their own problems, I’ll talk you through the basics of investing sustainably using both in the next couple of articles.

The  second part, on investing sustainably in bonds, is now up!

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Organic on the cheap

Hands holding a piggy bankAs our economic troubles deepen, Americans all over are cutting back. Before leaving organic food on the cutting room floor, try these strategies for reducing the cost of organic food. If you have any additional ideas, let us know in the comments!

Grow your own

It’s a long-term strategy, but growing your own food can be a good way to turn time into money. You’ll get the biggest bang for your buck for things like fruit trees and berry bushes that produce year after year. Highly producing plants like tomatoes, peppers, and zuchinni are also good. If you don’t have space for a garden outside, or you want to get started before it warms up, you can grow herbs in your kitchen.

Shop co-op

Although not available everywhere, co-ops can be great ways to get cheap organic food. The National Cooperative Grocers Association has a map of stores, but there are many co-ops that aren’t part of the organization. Some co-ops will give a rebate at the end of profitable years. Others will give a discount if you volunteer for an hour or two a week or for paying a one-time membership fee. It’s worth checking out!

Coupons and sales

Organic food tends not to be used as a loss leader at grocery stores, but you can sometimes find coupons anyway. Check the website of organic brands that you buy (like Organic Prairie or Kashi) and see if they have any coupons. Our local co-op even puts their sale prices online, so that you can check for bargains easily.

Buy bulk basics

Instead of getting packaged foods, buy the ingredients and make your own. Pizza, for example, can cost $6 for a small frozen, $8 at a local restaurant, and $3 if you make it yourself! Bread and pasta are similarly cheap. If you can find a local store with bulk bins, you can usually get good deals on beans and rice as well. Some co-ops, ours included, even have bulk containers for shampoo and soap!

Join a CSA

This is pretty similar to buying in bulk, but a CSA can give you additional savings. Basically, you pay up front (or agree in advance to pay through the season) and in return you get a discount. If you’re a picky eater or plan to be gone some weekends, get a friend to join with you and split your CSA. We did this with Maggie’s parents and it worked well. Some places even have dairy, bread, or meat CSAs!

Visit the farmer’s market

In some places, the farmer’s market is significantly cheaper. Around here, it’s about the same, since our co-op buys from the same people who show up at the farmer’s market. Even here, though, there are bargains to be had. If you show up towards the end of market, farmers are more willing to make a deal. Anything they don’t sell they have to get rid of (if it’s perishable) or lug back home (if it’s not), so they’re motivated. The drawback is that your selection is liable to be limited, although a CSA can generally fill in the gaps.

Pick and choose

If, in the end, you decide that you still can’t afford to eat organic, don’t quit entirely! Figure out what organic items matter most to you and splurge on those while cutting corners elsewhere. For example, Maggie has decided that organic butter is better, so it’s worth the premium. Other things, like beans, don’t matter as much to us. If health is your main concern, focus on organic goods that bioaccumulate (like dairy products). If environmental impact is what gets you to buy organic, then maybe you should get local, organic beef.

This is also a good time to be buying local, whether it’s organic or not. Money spent at local businesses is much more likely to stay within your community and might make the difference between a lean year and going out of business.

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Podcast 2: Black Friday, gift wrapping, and traditions

Today, Maggie and I talk about Black Friday, green options for gift wrapping, and creating new traditions.

Buy Nothing Day, which we mention in the podcast, is run by Adbusters, a magazine focused on reducing consumerism.

This podcast is about 12 minutes long, which is twice as long as last week’s. Maggie and I aren’t sure what the best length is, so we’re hoping you’ll listen in and let us know what you like best. We look forward to your comments!

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Learning About Mortgages

Coin TowerWill and I went to talk to a mortgage broker today at Lotus Mortgage. We’re starting to get serious about buying a house and we figured our next step was finding out if we even qualify for a loan. It turns out that we do, which is very reassuring. We don’t make a lot of money but we have really good credit (the broker told me I have the highest credit score he’s every seen for someone under 40) and we have quite a bit of money in savings – at least as a percentage of our income.

I felt really good hearing that we’re doing all the right things financially but really bad hearing that there are a lot of people out there – of all income levels – who are not doing it right. It is very scary to me that there are people making six figures who have less money in the bank than we do. It’s especially scary as I start to hear more about increasing foreclosures and an impending recession and people being abruptly reminded that credit is not a source of free money.

I think part of the reason we’re doing well financially is that we put a lot of effort into living sustainably and in accordance with our values.  (Part of it is also an ingrained terror of debt.)  We have a strong set of goals we’re working towards and we spend (and save) our money accordingly.  It’s frustrating sometimes and a lot of times I struggle to identify my next goal but in general it keeps me going in the right direction.  I’ve also learned that not buying something very rarely makes me unhappy.  There are moments when I think “If only I had enough money to buy a fancy compost tumbler!” but they honestly don’t last that long.  And those times when I do spend $50 on something I thought I desperately wanted, I generally lose interest within a couple of weeks.

I believe a house will be a satisfying purchase.  Will and I are still debating about some of the details like which house and what features are we looking for but I’m sure we’ll figure it out eventually.  Or perhaps we’ll buy one of those charming country homes with a 1200 square foot detached garage and one of us can just live there.

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Globalization – chartreuse, perhaps?

Child with globeI too read The Undercover Economist and while I enjoyed it as much as Will did, I am still not convinced that Globalization is Green. The book did provide a lot of food for thought and it made me rethink why I have such a gut opposition to globalization. I think I’ve come up with a few answers.

1. The global economy is not perfect. My number one frustration with economists is that they like to talk about perfect systems when they know quite well that reality is something completely different. (I often have this problem with physicists as well.) Tim Harford is very good about admitting what is model and what is close to reality. His whole point is that if we embrace globalization fully and get rid of tariffs and other protectionist laws, everyone will be better off. That may well be true but I don’t see globalization happening that way. Every country is trying hard to globalize while still keeping the upper hand, whether in terms of agricultural subsidies or import taxes on foreign steel and in the process a lot of people are getting screwed over. That’s the kind of globalization I’m not a fan of.

2. Globalization tends to erode traditional cultures. I have strong yet conflicted feelings about Westernization. I do believe it’s important for people to be exposed to knowledge and viewpoints from around the world but at the same time I hate to think that everyone is being exposed to “American Idol” and McDonalds. I am not a huge fan of American culture and it makes me sad to hear about countries and regions whose youth are abandoning traditional ways in favor of becoming more Westernized. Perhaps I’m just being sentimental but I believe we are losing knowledge and social cohesion when people give up village life to go into the city or when indigenous tribes are forced off their land to a new area because that land has become a valuable economic resource.

3. Economic defenses of globalization tend to ignore all the important stuff because they are externalities. I would be very excited if Tim Harford wrote another book where he laid out a proposal of how to account for all the “externalities” – things like pollution, traffic, reduced natural resources, landfill space, etc. that are not part of the economic transaction. He did give a few interesting examples about how we should combat air pollution by charging people extra money to drive during rush hour or in smoggy areas so there is a direct connection between the undesirable activity and the monetary penalty. However, there’s a lot more scenarios out there to figure out and I don’t think anyone is making much progress, even though trade and globalization is expanding rapidly. I want to see real costs with all those externalities factored in.

4. Local food is important. This one may reveal the depths of my hippie-ness and I’m okay with that. There is something that makes me really uncomfortable about trading food all over the world. Part of it is a transparency issue – it gets harder and harder to figure out how my food was raised when it is made from a mixture of products that were shipped in from all sorts of places. Part of it is a security issue – it just seems dumb to have a large population in an area that can’t provide enough food (or water – hello Los Angeles!). And I’m sure part of it is my rather radical belief that it’s healthier for people to eat food that was grown close to home because it has the right nutrient levels and familiar bacteria and appropriate adaptations for the climate. I’m not against trading for things that can’t be grown in one area – I love bananas! – but shouldn’t the bulk of our food come from nearby?

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