Most of the people do not know that there are investment options for all kind of investor.
Whether you very conservative or very agressive investor.
The goal of investing must be at least to retain value of current dollar. Due to inflation what you can buy today with $1, you will have to spend
significantly more (at retirement time) at some later date.
Generally, inflation ranges from 2 to 5% a year. So, the bottom line is, you have to make an average 3.5% to just keep up with the inflation.
Bank : This is one of the most safest place to stash your money. As most of the banks are FDIC insured for individual account up to $100K, you are guaranteed to receive your
money back in case of bank melt down upto $100K. So, if you don't want to take risk at all, put money into banks. But,
Checking Account: Leaving your money into checking account gives you interest around "0.25%", which is singificantly lower than the
inflation rate. That mean your dollar value is declining eveyday by leaving money into checking account.
Savings Account: Leaving your money into savings account gives you interest around "0.25% to 1.0%". If you have account in local credit union then you can expect little more.
But, this will not save you from inflation.
Money market account.
CDs: A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account.
Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for fixed period of time
– six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically
at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus
any accrued interest. But if you redeem your CD before it matures, you may have to pay an "early withdrawal"
penalty or forfeit a portion of the interest you earned.
What should you know!
- Find Out When the CD Matures
- Investigate Any Call Features
- Understand the Difference Between Call Features and Maturity
- Deal directly with bank, unless you are familiar with broker
- Any Penalties for Early Withdrawal
- Confirm the Interest Rate You’ll Receive and How You’ll Be Paid
- Does the Interest Rate Ever Changes
I-Bonds are U.S. Savings Bonds that are designed to offer protection from inflation.
The interest that I-Bonds pay comes in two parts: a fixed interest rate and a variable interest rate.
The fixed-rate portion is set when you buy the bond. Remaining interest payments come from the
variable-rate portion, which changes twice a year based on inflation, as measured by the Consumer Price
Index (CPI). If the I-Bond is paying a 1% annual fixed interest rate and a 2.5% annualized variable
interest rate. That means the composite rate is 3.5%.
You can buy up to $30,000 worth of paper I-Bonds each calendar year at your local bank. In addition,
you can buy up to $30,000 in electronic I-Bonds through TreasuryDirect. If you cash out before you've owned the bonds five years,
you will lose three months' worth of interest. Still, even minus the three-months' interest, the
rate may beat other alternatives. For more on purchasing I-Bonds, visit TreasuryDirect's.
You won't receive interest from your I-Bonds until you cash them in or they mature. So you don't
have to pay tax on the interest as it accrues. At maturity or redemption, interest on I-Bonds is subject
to federal tax, but not state or local tax.
TIPS (Treasury Inflation-Protected Securities)
TIPS are government-issued
bonds that provide a hedge against inflation. TIPS set their interest rates when
they are sold. However, the bond’s underlying principal rises and falls with changes
in the inflation rate, and as it does so, the amount you'll receive as interest
also changes, but at maturity you'll always get at least the par value of the bond.
Interest is paid out semiannually. When the bond matures, your final principal value
is adjusted for inflation during the term of the bond.
TIPS are guaranteed by the U.S. government and are exempt from state and local tax.
have to pay tax on distributions. for the semiannual interest payments you
receive, as well as on the "phantom income" you receive as your underlying principal
adjusts for inflation. You won't actually get this inflated principal until the
bond is redeemed, but you'll be paying tax on the adjustments annually. If that
tax is significant, you could find yourself in a negative cash flow situation--more
is going out in tax payments than is coming in through interest payments.
TIPS are most often recommended for tax-deferred accounts.
If you put TIPS in most tax-deferred accounts they'll lose their state and
local tax-exempt status. That's because when you eventually take securities out
of most tax-deferred vehicles, they're taxed at ordinary income-tax rates at federal,
state, and local levels. So, for investors in lower tax brackets, especially those
who live in a state with high tax rates, TIPS may make sense in a taxable account
or Roth IRA.
Simple way of buying is through mutual funds, like
Vanguard Inflation-Protected Securities
PIMCO Real Return
Fidelity Inflation-Protected Bond
or you can buy through TreasuryDirect
and avoid fees.
In deflationary situation, you are guaranteed to get atleast face value of TIPS when it matures.
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