HERE IS AN INVESTMENT GUARANTEED TO KEEP PACE WITH INFLATION-Part 2

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Categories: investing, bonds

 “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”  Ronald Reagan 

Since we haven’t had much inflation in recent years, it’s easy to forget about it’s VIOLENT IMPACT.

One of President Reagan’s (1981-1989) political challenges was combating the rampant inflation of the time. He entered office after record inflation levels of inflation!

Check out what Reagan was talking about. These are the inflation rates from 1975 to 1986: 

Just so you get an idea of what it really means, if you bought a video game in 1975 for $47.38, that same game would cost $100.00 in 1985. Don’t get complacent and think that we will never have high inflation again. It’s quite likely, that higher inflation levels will return in the future!

MAIN TOPIC: Protect your Money from the Ravages of Inflation

The previous post  talked about buying I Bonds as a way to invest and make sure that your investment keeps up with the impact of inflation. Even with 3% inflation per year (the historical average), your $10.00 meal out will cost $13.44 in 10 years. Now, bump inflation up to 5% and watch that $10.00 meal go up to $16.29. Now, apply those inflation increases to EVERYTHING YOU BUY. Don’t think you will avoid inflation in the future.

Here’s another investment which keeps up with inflation and is also issued by the government: TREASURY INFLATION PROTECTED SECURITIES. They have the same goal as Series I Savings Bonds, TO PROTECT YOUR CASH FROM INFLATION RISK so when you need it in the future, the purchasing power hasn’t been eroded.

 TIPs are bond-like investments issued by the US government. They have a fixed interest rate… BUT they keep up with inflation because when INFLATION RISES the principal amount of the security (bond) also goes up. On the flip side, when inflation drops, so does the principal amount of the bond. At the treasury direct website there is lots of information about TIPS.

PRACTICAL APPLICATION: What are Treasury Inflation Protected Securities (TIPS)?

Government Bonds 101

Buy a government bond and you are making a loan to the U.S. Government.

In exchange for the loan, the government pays you interest.

 FACTS ABOUT TIPS:

You can buy them on-line here. They can be purchased in increments of $100.00.

TIPS have maturities of 5, 10, & 30 years.

You can hold it until it matures OR you can sell it in the open market thought an investment brokerage company like Charles Schwab, E*TRADE, Fidelity, Vanguard, or TD Ameritrade.

They are subject to federal tax only, NOT state or local. You pay the tax in the year it is earned.

 THE EASIEST WAY TO BUY TIPS:

There are several mutual funds which hold many TIPS in various maturities. It is really easy to buy them, through one of the Investment Companies listed above. This article offers a comprehensive list of advantages to purchasing a TIPS mutual fund

How do I Bonds & TIPS compare?

RISK is always a factor in investing.

 Inflation risk manifests insidiously by causing the same dollar to purchase LESS & LESS product(s).  Another way to look at inflation is; the identical goods cost MORE and MORE. A savings account or CD (Certificate of deposit) is subject to inflation risk as the interest rate stays the same even though inflation may be rising.

 Series I & TIPS government bonds protect your money from inflation risk.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.  

Jot down the advantages and disadvantages for this investment for you. Visit the treasury website  to get more information about inflation protected investments.

 Caveat: This article is for information purposes only and may not be appropriate for your individual situation.