Making Your Money Recession Proof with Treasury Inflation-Protected Securities (TIPS)

With the economy seemingly falling apart around us, it goes without saying that we want to do our best to make sure the value of our money does not fall with it. There are many options for doing this, and each of them pertains to a different type of individual. Let it be known first of all that I am by no means any kind of investment adviser or broker, and the purpose of this article is to inform you of just one of the many investment possibilities out there. Do not take it as investment advice, and always consult a qualified professional before making any important financial decisions. That being said, let's move on.

One of the main causes for concern in these rough economic times is the possibility for a heightened rate of inflation. In layman's terms (the kind that I prefer), this means that your money will be worth less because the total amount of money in circulation will increase. This could spell disaster for anyone with a substantial amount of their money invested in any kind long-term, fixed interest account. Let's think about that. While your money is stuck in an account for a long number of years, making a fixed amount of interest, the value of money is decreasing because of inflation. This could mean that, depending on how long your money is tied up, it could actually lose a substantial amount of its value because the dollar might be worth much less by the time you get it back.

There are a few different ways to protect your money against inflation, but one of the most overlooked are TIPS, or Treasury Inflation-Protected Securities. TIPS adjust the principal for inflation twice a year based on the Consumer Price Index. Also twice a year, a fixed interest rate is paid for the adjusted principal. This way, both the interest and principal are protected from inflation. If deflation has decreased the value at maturity, you are still guaranteed to receive the original principal.

Sound too good to be true? Well, there are a few drawbacks to consider before you go out and start buying TIPS. First of all, the interest rates on TIPS will be quite a bit lower than other options, due to the inflation protection. Some people looking to make money off their investments might steer clear of TIPS because they are generally longer-term investments, and sold in five-, ten-, and twenty-year maturities and are only available in increments of $1000. Finally, you have to pay tax on the interest as well as any increases to the principal, even though you won't receive the inflation-adjusted principal until the bond matures. Because of this, it's recommended you hold your TIPS in a tax-deferred account.

As you can see, there are both pros and cons to investing in TIPS. Even though there are options out there that will make more short-term money, those that want to ensure the long-term protection of their assets might want to give some thought to investing in these theoretically inflation-proof bonds.