Protect Against Rising Prices

I took advantage of a free subscription to Money magazine several months ago and I’m so glad I did. The magazine has lots of interesting articles and useful investing and money tips. This month they had their annual best list which features 100 of the safest investments, sharpest tax strategies, hottest job markets, smartest savings ideas and best deals.

I often get ideas for Money Matters in this and other similar magazines. Plus, I get great satisfaction when they publish a money tip that I already posted! Case in point, in this month’s best list Money suggests the best place to park your emergency fund is in a high-yield savings account. Great validation for my post HERE!

In their best list this week I saw something that was really intriguing to me. I don’t normally list investment advice because most people have varying strategies and acceptable risk levels. But I thought this particular item was very interesting and might be something you would want to research further.

Treasury Inflation-Protected Securities (TIPS)
According to Money, the best protection against rising prices are Treasury Inflation-Protected Securities (TIPS). You likely remember my posts on the economy (if not, start HERE). Due to all the stimulus programs, rampant government spending and low interest rates, inflation can be a real threat for our immediate future. Inflation effects and turnarounds can be sudden and are not a good thing for investments. TIPS are terrific insurance against that risk because their principal is pegged to consumer prices (CPI).

How They Work
Very simply speaking lets say you put $1000 in a 5-year CD. This CD earns 4%. Let’s say inflation this year is 3% but next year jumps to 5% and stays at 5% for the next 4 years. Your money is stuck and you won’t be making any money because the inflation rate jumped above the rate you are earning. Conversely, if you put $1000 in a TIPS and it only gets 2% interest, it might seem less enticing. But if you know that the principle would adjust with inflation so you would still be earning money even when inflation jumps it might make the investment a little more appealing. These would also be a great tool for retirees because inflation-protected investments can help fixed income keep up with inflation while still getting a small return on your investment.

The Fine Print
Because of the inflation protection, TIPS typically offer a lower rate of interest than other 10-year Treasury securities that don’t have the feature. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal. So, like the principal, interest payments rise with inflation and fall with deflation. TIPS are subject to federal income tax, but not state or local taxes. You can buy them from the government at Treasury Direct or through a broker or bank. Based on my research I would recommend purchasing a individual TIPS instead of a TIPS Bond Fund. Remember, higher interest = higher risk. Period.

Now, I’m not saying that you should run out and buy these right now. I just wanted to give a brief overview because I wasn’t aware of the benefit to these types of investments. I encourage you to do more reseach and/or discuss with your financial advisor. Remember, investment options are not one size fits all. You need to find the ones that best fit your situation. It might be a TIPS but it might be something else too.

For more info, you can read in depth at Treasury Direct HERE.

Happy Investing!