Imagine turning $100 into a financial safety net that grows stronger as prices rise. Enter Treasury Inflation-Protected Securities or TIPS, the❀ hero of savings bonds that fights inflation while it 👍grows your money.

TIPS have the safety and stability of regular government bonds, but with a twist. Instead of set returns that just sit on the side no matter what happens, they grow to match rising prices. That's because the U.S. Treasury guarantees TIPS will never lose value to inflation. They pay interest twice a year, but the real magic happens to your original $100. That amount adjusts up when inflation rises, meaning your investment grows in real value.

Then, when your bond matures in🌸 five, 10, or 30 years, you get back your initial investment plus all those inflation adjustments—whichever is hi🌜gher.

The best part? You can start with just $100. It's like planting a tiny money tree that's weather-proofed against economic storms.

What Are Treasury Inflation-Prote�ജ�cted Securities (TIPS)?

TIPS are the financial world's shock absorbers. These government bonds protect your investment from the shock and corrosive effects of rising prices.

Here's how TIPS work:

1. Inflation-linked principal: The amount you initially invest grows automatically with inflation, as measured by the Consumer Price Index (CPI). This ensures your money keeps its purchasing power over time.
2. Interest payments: TIPS pay interest twice yearly at a fixed rate. While this rate stays constant, the actual dollar amount you receive grows as your principal adjusts for inflation.
3. Maturity guarantee: When your TIPS mature, you receive either the inflation-adjusted principal or your original investment, whichever is greater. This gives you a safety net even in the unlikely event of long-term shifts in the value of the dollar.

TIPS are accessible to most investors, with a minimum investment of $100. They come in five-, 10-, and 30-year terms, allowing you to choose a timeline that best fits your financial goals.

Below, we've calculated how much would be gained by having invested $100 in TIPS for the 20-year period starting in 2004. This was a relatively low-inflation and low-interest rate period, until the last couple of years, so it should be on the lower end of expected gains from TIPS. You can hover over the line to see the changes over time.

Why Those Worried About Inflation Turn to TIPS

In recent years, 澳洲幸运5官方开奖结果体彩网:inflation has roared back into the spotlight, with the 2022-to-2023 period seeing the highest U.S. inflation rates in 4🀅0 years. While it's cooled somewhat since then, the sting of $7 for a dozen eggs and $5 gas lingers in the memories of many.

The inflationary surge is a stark reminder: inflation can quickly erode your hard-earned savings and investment returns. The economic rollercoaster of rece🍬nt years has thrust inflation back into the spotlight.

This is where TIPS𝄹 shine. As inflation rises, your investment grows right with it. Unlike traditional bonds or savings accounts that can lose real value during inflationary periods, TIPS ensures your money keeps pace with rising prices.

Let's make this concrete: Most households buy milk weekly at the store. The cost of milk, adjusted for inflation, has come down over time, from about $4.86 in 1995 (2024 dollars) to $4.04 in 2024. But if we look at your family's ability to pay for milk over time, that's shifted around quite a bit, making it crucial for every household to pay attention to the effects of inflation.

If y🤡ou had invested $100 in TIPS, your principal would have grown to match these shifts, preserving your milk purchasing power, so to speak.

Example of How TIPS Work

Let's look at a hypothetical of how TIPS work. Imagine you bought $100 of a 10-year TIPS with a 2% interest rate in a year when inflation was 3% in year one and 4% in year two. Here's what would happen:

澳洲幸运5官方开奖结果体彩网: Year 1:

• Principal at the start of the year: $100
• Adjusted for 3% inflation: $100 × 1.03 = $103
• Interest for the year: $103 × 0.02 = $2.60
• Principal at end of year: $102.60

澳洲幸运5官方开奖结果体彩网: Year 2:

• Principal at start of year: $102.60
• Adjusted for 4% inflation: $102.60 × 1.04 = $106.70
• Interest for the year: $106.70 × 0.02 = $2.13
• Principal at end of year: $108.83

This would continue each year, with the principal adjusted for inflation and the interest payments based on th🧔e adjusted principal. At the end of the 10 years, you would receive the adjusted principal, along with your final interest payment. Below is the interest TIPS has been paying on 10-year bonds:

H🔜ow Much $100 in TIPS ⛎Could Generate Over 20 Years

Let's shift the example a bit to see how a $100 investment in TIPS might grow over 20 years. Using a 30-year TIPS maturing Feb. 15, 2044 (meaning it was issued in 2014), and a coupon rate of 1.375%.

The bond's coupon rate of 1.375% reflects the lower interest rates when the TIPS were issued. Interest rates have risen since 2014, and the bond's market price has decreased to reflect how newer TIPS are paying higher interest rates.

When interest rates rise, the prices of existing bonds fall because investors can buy new bonds with higher coupon rates. Understanding this inverse relationship between bond prices and interest rates is fundamental when investing in bonds.

In this case, the 30-year TIPS maturing in February 2044 would trade 澳洲幸运5官方开奖结果体彩网:at a discount, around $91.50, to reflect the higher interest rates for newer bonds. However, the adjusted principal of the bond for those who purchased it in the past w꧟ould likely have increased due to inflation over the past 10 years.

Scenario 1: Inflation = 0%

In this example, we assume there's no inflation for the 20-year period.

• Starting principal: $91.50
• Annual interest payment: $100 × 0.01375= $1.26
• Total interest over 20 years: $1.26 × 20 = $25.20
• Principal at maturity: $100.00
• Total aggregate value at maturity: $100 + $25.20 = $125.20

Without any inflation, your principal remains unchanged, and you receive $1.26 in interest each year🌳 (paid e🍌very six months). After 20 years, you would have received a total of $25.20 in interest payments and the original $100 face value back, for a total of $125.20.

Scenario 2: Rising Inflation

In this example,༺ we assume that inflation averaged 5% each year over the 20-year period.

For a 30-year TIPS bond issued 10 years ago and bought today on the secondary market for a discount at $91.50, the CPI adjustments would still be applied to the bond's original adjusted principal as of today. This would reflect the cumulative inflation or deflation over the past 10 years. Let's say that the adjusted principal basis is $120 at the beginning of year one.

The principal starts at $120 at the beginning of the first year, reflecting the cumulative inflation of 20% over the 10 years before your purchase. The annual inflation adjustments and interest payments are then calculated based on this s♊tarting principal and the 5% yearly inflation rate for the next 20 years.

Even though the bond was bought at a discount, the adjusted principal of $318.40 is returned to the investor at maturity, along with the accumulated interest received each💝 year (totaling $110.69).

Scenario 3: Deflation

Let's provide a rare scenario and assume mild 澳洲幸运5官方开奖结果体彩网:deflation averages -0.2🎶5% annually over the 20 years. If you had bought the TIPS directly at issuance, you would not see your principal value drop below the initial $100, and you would receive that back at maturity. Since our example involves buying a TIPS on the secondary ma🌞rket at $91.50 at a discount, you would still be guaranteed at least the original $100 face amount at maturity, even if there is deflation.

When you purchase a TIPS bond on the secondary market at a discount (i.e.๊, below its face value), you will receive the higher vꦦalue of either of these:

1. The adjusted principal value at maturity, which accounts for inflation or deflation since the bond's original issue date or
2. The original face value of the bond (not your purchase price).

Thus, purchasing a TIPS bond on the secondary market at a discount protects against deflation since you are guജaranteed to receive at least your purchase price at maturity.

However, deflation will result in lower interest payments over time since the fixed coupon rate is applied to a gradually decreasing adjusted principal. Despite the deflation, you would still likely realize a small positive total 澳洲幸运5官方开奖结果体彩网:nominal return becaus꧋e of the combination of interest payments and the return of the $100 principal at maturity.

How to Buy TIPS

You can buy TIPS directly from the U.S. Treasury through the 澳洲幸运5官方开奖结果体彩网:TreasuryDirect platform in five, 10, and 30-year terms with fixed interest rates. The minimum investment is $100 and they are sold in increments of $100.

To buy TIPS, you need to first open a free TreasuryDirect account. You'll give your Social Security Number, email address, and bank account information. You can then schedule a purchase of TIPS, and the money will be taken from your bank account. The TIPS interest rates and secondary market prices are available online.

You can also buy TIPS🃏 through banks and brokers in the form of a mutual fund or exchange-traded fund that holds TIPS of various maturities. This can provide more liquidity and diversification compared with buying individual TIPS.

The Bottom Line

TIPS are an attractive investment for protecting your money from inflation, even with comparatively small starting funds of $100. The principal is adjusted based on the CPI, helping to preserve your purchasing power. Over a 20-year period, $100 invested in TIPS could grow to over🌌 $200 if inflation averages 3% or more annually due to the combination of inflation adjustments to the principal and accumulated interest payments.

However, TIPS may also underperform other bonds, and by themselves, they are not a complete investment strategy. Consider your overall portfolio, long-term goals, and 澳洲幸运5官方开奖结果体彩网:risk tolerance when deciding on your investments.