Monthly Archives: February 2018

10 Articles About Inflation Protected Bonds

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Tree Under Umbrella

source: freeGraphicToday (Pixabay)

Here’s a list of 10 articles I found that provide information about Inflation Protected Bonds.  Learn more about how I Bonds and TIPS work and good reasons to use them for long-term savings.

Zvi Bodie: I Bonds Are Best for Most Investors

by ThinkAdvisor.com

This is an interview with Professor Zvi Bodie about the safest way to invest for your retirement needs.  He explains the clear benefits and why he believes that more people need to hear about this ultra-safe way to prepare for retirement.

What are I Bonds?

by www.ibonds.info

This overview of I Bonds briefly explains their benefits and how they compare to other investments in general.  It describes I Bonds as a safer investment than other kinds of investments.  It has some very helpful graphics.  I believe is the best site about I Bonds I have found.  You might want to spend some time here looking around at all it has to offer.  This site also sports an up-to-date display of the current interest rate being offered by I Bonds in the upper right hand corner and contains great quotes that people have made about the benefits of I Bonds.

Fixed income that isn’t fixed

by Fidelity Viewpoints, Fidelity Investments

This article provides a good overview of TIPS from an investment perspective.  It also has a discussion about ETFs that give smaller investors access to something called Floating Rate Loans.  I’m not a fan of those at this time, but this article does have a discussion of those as well.

Hedge Your Bets With Inflation-Linked Bonds

by Christina Granville, Investopedia

This article give some great background on the history of Inflation Linked Bonds and provides a brief overview of how they relate to investments in an investment strategy.  I tend to not care about investment strategies in that I use inflation protected bonds for long-term savings.  This article also provides the names the inflation protected bonds available in other countries.  Don’t get too concerned about the discussion about deflation.   She mentions at the end, it doesn’t apply to those of us using it for long-term savings.  I intend to address that issue in another article.

The Investment TIPS You Should Care About

by Wade Pfau on Forbes

This article is directed toward those of you who already think in investing terms.  It’s a bit technical compared to some of the other articles.  The author discusses some of the oddities regarding TIPS and their relationship to other bond investments.  He briefly discusses the idea of real and nominal yield and the difference in thinking that goes along with investing in TIPS.

TIPS: Understanding Treasury Inflation-Protected Securities

by Dan Caplinger on The Motley Fool

This is a great article that covers the history that the United States had with the bond market and inflation during the 1970s and 80s.  It does a great job of explaining the benefit and protection that TIPS provide.  The article concludes by recommending ETFs and Mutual Funds.  I’m not a huge fan of funds.  I hope to explain my viewpoint in a future article, but I have held them at times because I believe that they are some of the safest ones to hold.  This article is not very technical and a great one to read to get some background on TIPS.

Negative TIPS Yields

by Thomas Kenny at The Balance

One of the most alarming and confusing things to discover about investing in TIPS is that they can show a negative yield during certain times in the economy.  This article explains why that happens.  This is another topic I hope to make more clear in the future as well.  It’s good to note that your bank account has been giving you negative yields for several years in a row when you adjust your returns for inflation.  TIPS are just more easily exposed when this happens.  You can choose to not buy TIPS when they go negative.

Tracking Inflation and I Bonds

by TIPS Watch

This is a page on a site all about TIPS that tracks the interest rates of I Bonds.  It also explains how I Bond rates are calculated.  If you want to see the history of I Bond rates, you can see that on this tracking page.

Series I Savings Bonds

by Treasury Direct

This is the United States Treasury Department’s information on I Bonds.  You can get all of the most accurate and latest information here including the current interest rates and how they are calculated.   If you want to buy them, you are only a few clicks away.

Treasury Inflation-Protected Securities (TIPS)

by Treasury Direct

Here is the United States Treasury Departments description of TIPS.  This is where you will find the most up-to-date information on them.  It’s not that hard to understand but you may need to invest a little time reading and thinking about it.  I don’t think you need to know much about investing to understand what it said here.  You can also buy TIPS directly from this site.

 

Bonus Articles

How to Buy an I Bond
If you are ready to buy an I Bond but don’t know how to get around at TreasuryDirect.gov, I can help you with that here.

Stressed about Savings? Divide and Conquer
You might consider a strategy that separates savings from your more risky endeavors. Here’s how I like to think about it.

Inflation Protection and Taxes
Taxes are a real problem when it comes to inflation protecting your savings. Learn more about that here.

Thinking of Retirement as Standard of Living Insurance

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Professor Zvi Bodie of Boston University said something that really shaped my thinking about retirement savings.  He said that we should think about retirement savings more like we think about insurance.  When I tried that, I realized that it caused me to challenge the advice about retirement that I often hear and read about.  It exposed something that I was seeing that I knew didn’t seem right as I was planning for retirement.

Assurances are not Guarantees

Fund managers want you to invest in their products, but they don’t give guarantees.  They are careful to have disclaimers so that we understand that we could actually lose our money.  That’s worth taking time to consider.  Professor Bodie says that these management companies are in a far better position to understand risk management than the common person, yet they refuse to guarantee that you will even have your retirement savings when you need it.  They give assurances, but they refuse to give a guarantee.  Professor Bodie says that the reason they don’t give a guarantee, is that they can’t.  Instead, they leave the risk of the investment with the person who is least knowledgeable about what they are doing.

A good thing to ask ourselves is: “Why can’t they give a guarantee when they are managing the money?”  The answer is: “Because the investments they use are risky and they know it.”

Professor Zvi Bodie does a great job of explaining the problem here in his video:

Is it really Savings?

I think that there is terminology that retirement fund salespeople should not be using.  They often refer to the money that we put into mutual funds or the stock market and other volatile investments, as our “retirement savings.” In my opinion, the money we are putting into those kinds of investments are actually “retirement ventures.”  Since no one is committed to maintaining a specific amount of money in those accounts, I don’t think that it can legitimately be called: “savings.”

When we use the word “savings” we naturally think of money in a piggy bank or money in a banking institution.  In those places, our money is insured in some way.  Our piggy bank is locked in our house and our bank accounts even have deposit insurance from the federal government.  We naturally expect that when we return to our bank, we will find the same amount or more than we left in it, but that’s not how most “retirement savings” accounts work in my experience.

Unfortunately, we need to be on guard when money managers use the term: “savings.”

Guaranteeing our Savings

There are ways to guarantee savings, and some of them come at a cost.  We know that insurance has a cost because many of us have insurance for other things like healthcare,  our cars or a house.  Insurance costs something because someone else is bearing a risk for us.  When we think of something as important as our retirement, doesn’t it make sense to insure that it will meet our basic needs?  Sure there are things in retirement, like golf or fancy vacations, that we don’t really need.  I’m not talking about that necessarily, but what about food and medical needs?  What about the power bill or visiting family for Christmas?  Do we want to become a burden on our adult children when it can be avoided?

Zvi Bodie brings up an interesting point in another place.  He suggests that we consider the fact that we are willing to pay $1000 for fire insurance for our house even though it is very unlikely that our house will burn down.  The chances are very small, yet we still pay for it.   That’s because we believe that the seriousness of not having a house outweighs the fact that it is unlikely to happen.  What good a house if I am unable to live in it in because my retirement savings has disappeared?  It doesn’t really make sense to protect the house and not protect my income.

Two Categories of Retirement Funds

Thinking about retirement in this way leads to dividing our retirement funds into two parts.  One part is the part you reasonably believe you can’t do without in your old age.  The other part is for things that you hope for, but that are not critical to your survival.  When we divide it up like this, and get insurance for the critical part, it can lead to peace of mind knowing that our critical retirement needs are guaranteed to be there for us.

Guaranteed Retirement Options

When it comes to ways to guarantee the critical part of your retirement, you might be imagining a large piggy bank or perhaps a bank CD.  If you have been reading my blog, however, you know what I think about that.  Both piggy banks and CD’s are not usually inflation protected, which means that they are not a guarantee.  They fail to be a guarantee because you don’t know what the contents of your piggy bank will buy in 30 years when you need it.

There have been CD’s that were “inflation-linked” in the past but I have not seen any in the last few years.  Hopefully, demand for them will increase and they will be offered again in the future.

Social Security

One obvious form of retirement insurance is Social Security.  It is inflation protected and it’s definitely something to consider when thinking about your critical retirement savings.  Social Security is likely to go through some changes in the future, but I expect that something very similar to it will be available for a long time to come.  There’s more about this investment in the article: Possibly the Most Popular Inflation Protected Investment.

Company or Government Pensions

If you happen to have a job that offers a pension that adjusts your payments for inflation, you are in a good position.  When I say pension, I mean the old fashioned kind that doesn’t require that you manage the money and that does provide a written guarantee.  Pensions that don’t adjust for inflation, are helpful but they don’t guarantee that you won’t run out of money to pay your expenses in the distant future.

Be Careful With Insurance Annuities

Other insurance products are provided by insurance companies by way of inflation adjusted annuities.  I would just make sure that the inflation adjustments are connected to actual inflation and not a flat percentage increase each year.  It’s important to understand how much you are paying for that insurance up front too.  Beware: Insurance companies use the word “guarantee” in a similar way that fund managers use the word “savings.”  Make sure you know what they are actually guaranteeing.  Guaranteed percentages are not the whole story.  You also need to know the exact amount of principal the percentage is calculated against.  If the principle goes down with something other than inflation, it’s not much of a guarantee.  Also remember that if the guarantee isn’t in writing, it’s still not a guarantee.  Insurance companies do and have gone out of business.  Zvi Bodie recommends splitting up your funds between companies.

Home Equity

The Equity in our homes really is a form of inflation protection.  Because a house is a physical thing that represents one of our important needs, it’s automatically inflation protected.  Its value goes up with inflation because a house is still a house no matter what the value of money is.  Just having your home paid off is big part of insuring your retirement.

This presents an option for those who have no heirs or have no other choice.  Many of us spend our lives paying the bank to own a house.  The tables can be turned.  It is possible to sell the equity to the bank and have them pay you to live in your own house.  That’s what is called a reverse mortgage.

Once again caution is needed.  Make sure to read everything in any contract to make sure that the bank isn’t taking too much for themselves in the deal.  They may woo you with assurances that the remaining equity will go to your heirs, but I am told that this is often not the case because of high fees.  Again, there’s no guarantee.

Another thing to consider is selling your house to your heirs, with permission to continue living in the house as long as you can.  Working a deal with your loved ones could be a practical option and it can be a win-win situation with them.

Inflation Protected Bonds

My favorite option is to use Treasury Inflation Protected Securities and I Bonds for savings that I want to insure.  I do have to do a bit more work myself, but fees are low or non existent.  These are just boring government bonds that usually don’t make a whole lot of interest, but they do one thing very well: they protect long-term savings from inflation and that’s what I’m looking for when it comes to protecting the critical part of my retirement savings.

Further Reading

How to Buy an I Bond
If you are ready to get some I Bonds right now and protect some of your savings, I’ve made some step-by-step instructions to help you set up your Treasury Direct account and purchase your first I bond.

Introducing Treasury Inflation Protected Securities (TIPS)

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Bill in wood chestTreasury Inflation Protected Securities or TIPS, are one of the most valuable tools we have here in the U.S. to protect our savings from inflation.  In this article I provide a simple overview of what they are and how they work.

TIPS are really just a type of bond offered by the United States Treasury.  The United States Treasury has been offering bonds since 1935, but TIPS have only been offered since 1997.  The thing that makes TIPS bonds different from other bonds offered by the Treasury, is that these bonds are “indexed” to inflation.  Indexing a bond means that something about the bond varies with an index and an index is just a way of measuring something else.  TIPS bonds are indexed to an the CPI-U which is maintained by the United States Bureau of Labor Statistics.  That index is also called the Consumer Price Index.  It’s a measure of the cost of a broad range of things that we buy in the United States.  The CPI-U is a great topic for another post, but for now it’s enough to say that the CPI-U is a well established way to track inflation in the United States.

The United States Treasury sells these inflation protected bonds through their public web site: treasurydirect.gov.  That’s the same site you use to get I Bonds.  Here’s definition of TIPS at Treasury Direct:

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

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.

See: Treasury Inflation-Protected Securities (TIPS) at Treasury Direct

If you are new to the whole idea of “bonds,” there is a simple way to think about them.  A bond is really just a loan that you provide to someone else.  When you “buy” a bond, you are acting like a bank.  You didn’t really buy anything.  You actually loaned that money.  Instead of paying interest to someone else, they pay interest to you!  In the case of TIPS, you are loaning your money to the United States Federal Government.  So you can think of a bond like a piece of paper that says that someone owes you money, even though we don’t use paper anymore.  It gets a bit weird when you consider selling that piece of paper to someone else.   For our purposes, I would only consider that in an emergency situation.

The nice thing about loaning money to the federal government is that they tend to pay you back.  The kind of bonds that may not pay you back have a special name that you may have heard before.  They are frequently called “junk bonds.” The U. S. government bonds are likely to be paid because the government has a lot of control over our money.  The down side to loaning to the federal government is that they tend to not pay a lot in interest, but when you are just trying to save your money, it’s more important to find a safe place than it is to make money.  There are many more risky ways to invest your money that allow you gain (or lose) in higher amounts.

So, lets talk about how TIPS protect us from inflation.  If you have borrowed money before, you may have recognized that the amount that you borrowed was called “the principal.”  With TIPS, the amount that we initially loan to the government is called the principal, but it is “adjusted” over time with inflation.

For instance, if I loan the government $1000 using a TIPS, and the inflation rate is 3% and a year goes by, your principal would be “adjusted” by the government to be $1030 because of the inflation.  If inflation kept going up at 3% for the next year, they would adjust the principal again to $1060.90.  You don’t have to do anything and your loan amount automatically goes up!

One thing that I need to explain before going on, is the concept of “bond maturity.”  Bonds are loans that have a limited amount of time associated to them.  When a bond matures, you get your money back and the loan is over.  Time for that bond is up and you have to be paid back.  TIPS currently come in three sizes: 5 year, 10 year and 30 year.  It’s good to keep that in mind because you wouldn’t want to get TIPS like this if you think you might need the money sooner than 5 years.  This has to be money you are storing away for the future.  The fact that the date is right on the bond, though, makes it great for storing your money for specific future things, like a big vacation, college for kids, or retirement.  The government has promised to pay you back on a specific day and that’s the day the bond matures.

“Ah,” you say, “but what about deflation?”  That’s an important question.  What goes up must also come down, and TIPS will go down too, but TIPS have a special feature built into them.  You can never get less than the “face value” of the bond back at maturity.  Face value is the term they use to express the amount of money that the bond represented when it was first issued.   That actual principle is still protected from deflation.  If we happened to go through a time of deflation and the bond comes due at that time, you are sure to get your original amount returned to you.  For instance, if you purchased a $1000 5-year TIPS and you had five strait years of deflation that left your adjusted principal  at $900, at maturity you would still get the full $1000 back.  You would have actually earned $100 in purchasing power because things are cheaper to buy.

There’s even more good news about TIPS.  The government does pay some interest to you for loaning them money.  At the time I write this, there hasn’t been a whole lot of interest being offered for quite a while.  The last 10 year TIPS had an interest rate of 1/2 of a percent.  That’s probably not anything to write home about, but it can add up over time.  1/2 of a percent of interest on a TIPS is a lot more than what it seems on the outside.  It’s like a little secret that stays a secret because it’s confusing to people, but here’s how it works.

According to the Treasury’s statement above, your interest is paid twice a year on your “adjusted principal.”  Remember, that’s the loan amount that has been adjusted for inflation.  Using the example above, if I took that adjusted principal of $1060.90 and calculated the interest payment for the year, it would be: 1060.90 x .005 = $5.30.  Now, if I didn’t have a TIPS but had a regular ole’ bond, the calculation would be this: 1000 x .005 = $5.00.  What this means is that my interest rate is also adjusted for inflation. The $5.30 of today buys the same amount of gas or hamburgers as the $5.00 did two years ago.  It’s true that 30 cents isn’t that big of a deal, but it adds up over time.  That’s the problem we are trying to deal with.

With TIPS, you get paid in “real” interest and that makes a big difference when you are trying to find a safe investment.  As you can see, you don’t get much interest, but what you do get will always have the same real value.  Now when the Treasury says you get paid twice a year, that means you have to take the $5.30 and divide it in half, because interest rates are a yearly rate.  You actually would get paid $2.65 half way through the year and another $2.65 at the end.  Of course by then, it may actually be higher because inflation doesn’t stop half way through the year.

Now I need to discuss the bad news.  It’s not so bad for those of us who are trying to protect our savings, but it isn’t something fun to think about, that’s for sure.   Perhaps you have heard of the IRS.  Well, they don’t seem to understand or care about the fact that we are simply trying to save money that we have already paid taxes on. One of the most disturbing things about the current state of personal finance came to my mind when I realized what was going on here.

The IRS doesn’t recognize those principal adjustments as “maintenance” on existing earnings.  They see them as “new earnings” and you know what that means.  Yes, that inflation adjustment gets taxed, and it gets worse.  They take the taxes out the same year it is “earned.”  That means that while you are just watching your $1000 turn into $1030, the government charges you taxes on that $30 that same year, even though your TIPS has not matured yet and you don’t have the earnings.  You are going to have to come  up with the taxes out of what you have now.  That’s when the interest comes in handy.  It can be used to pay some, or perhaps even all of your taxes, but you will have to pay taxes on those interest payments too.

If you are like me, you need to take a few seconds to calm the mind after the bad news about taxes.  There is a good thing about the tax situation to keep in mind, however.  The federal government doesn’t allow the state government to tax you on federal bond earnings.  This is the same for other federal bonds as well.

The second piece of bad news has to do with how TIPS are purchased.  It’s not like I Bonds where you just pay your money and get a bond for the amount you pay.  For TIPS, the government actually “sells” them on an auction.  Now this is hard for investing newbies (and it should be because it’s so weird in my opinion).  It’s like they are auctioning off money.  Yeah, that’s right.  They will sell $1000 for $998.70.  That’s on a good day at the auction.  When they do that they say that you are getting a “discount.”  On bad auction days, they could sell $1000 TIPS for $1020.  They call that buying at a “premium.”  I’m sorry I have to explain this but it is reality.  At some point I hope to go into the history of TIPS so you have a better understanding of why this happens.  It isn’t very common to buy 10 year or 30 year TIPS at a premium, but it has been very common for the 5 year TIPS recently.  This means that at certain times, you could lose all of your interest to the initial price of the TIPS.  There may be times that it is worth the risk to wait for a better auction.  I am discovering that for my critical savings, protection is well worth the cost.

So those are the two bad things.  Inflation protection comes at a cost at certain times in the economy.  Remember, though, that TIPS may turn into a good investment during certain times too, but I think it’s important for us to see it as a protection, and often when we protect ourselves, we have to buy something.  We spend money to protect things that are important to us.  I have learned that, even in the bad times, TIPS can be beneficial because the their protection outweighs the small amount I may have to pay extra during certain years.

Now here’s a very good thing I saved for the last.  You can put TIPS into a Roth IRA account.  Those are the retirement accounts that are tax free.  This is the sweet spot for TIPS.  When you store your  retirement money in a Roth account, you can put the money into TIPS and watch it grow along with inflation, without having to worry about taxes taking it away.   You will need to get a Roth IRA at a brokerage that offers TIPS in order to do this.

TIPS are a great way to protect your long-term savings from inflation because they are tied directly to inflation.  TIPS are not very fancy in that they come from the government, and they can be challenging to understand.  There are costs associated with TIPS such as federal tax and the possibility of high prices at auction.  I hope that this has provided you a good overview of what TIPS are and how they work.

The Effects of Inflation

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Hamburger with fire background

Meditations (Pixabay)

Whether intended or not, one of the bad effects of a government-regulated monetary system, is that it creates a disconnect between money and the real things we need to buy.  Take food for instance. If we were use hamburger gift certificates instead of the money we use today, we would know that we would get the same amount of food for our money today as we would after leaving the certificates in a box for 10 years.  Somehow, we’ve managed to mess up our monetary system such that it is significantly more difficult to depend on it for real needs… like eating or clothing ourselves.

Let’s consider the effects of inflation using terms that we can actually eat.  Let’s assume that you had put a 10 hamburger certificate under your mattress in the year 2000, only let’s also assume that someone has allowed inflation to eat your hamburgers without your permission over time.  How many hamburgers do you think you would be able to buy today with an inflation adjusted 10 hamburger certificate?  By 2017, your 10 hamburger certificate would only buy you about 5.68 hamburgers.  This is quite typical, inflation is usually eating away at our savings.  There’s a website that makes it easy for you to see how the costs of things have changed over time as a result of inflation.  It provides a calculator that allows you to enter your own dates and amounts and see the effect for yourself using the government inflation data.

Try it at:  US Inflation Calculator

The problem is that once money is disconnected from something real, it can change in value quietly over time.  For much of the United States’ history, our money has been buying less and less over time.  There were periods in which inflation went backwards.  Yes, that’s called deflation.  That might sound good at first, but those times are often harmful as well.  One of the most notable times that this happened in our history was the Great Depression.  If deflation is happening to money, it’s likely that it’s because people don’t have jobs or money to pay for things they need.

Whether our problem is inflation or deflation, disconnecting money from something that is real is not a very good savings plan.  In order to plan, you kind of need to know how many hamburgers you will get to eat, shoes you will get to buy or tanks of gas you will be able to fill.  Thankfully, there are still some tools at our disposal that can help us combat the effects of inflation like I Bonds and TIPS.  They’re not quite as easy as putting money under your mattress, but at least they are available.

I Just Want to Save My Money!

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So, you are at the point where you have decided to stay out of the market and all you really want to do is save what you have for later.  The problem is, you haven’t found a way to save money for longer than a year or so, without feeling the effects of inflation.  A simple look at the inflation rates reveal that you would have to get an interest rate of somewhere around 2% just to break even!  With 5 year CD rates at 1.5%, you realize that you would be paying the bank half a percent to keep your money from you!  If you were an irresponsible spender, that might make sense, but you are serious about saving.  Now, am I the only one who thinks this is crazy?  Why are more people not upset about this?

Running Toward Risk

One reason might be that people have been placated by the possibility that they could make money using the stock market.  It’s hard for me to believe that this was not the intent of denying us the right to save our money.  I believe it is dishonest for any government to act like money is money if it can’t be saved for more than a few months.  It would also be pretty hypocritical for a government to complain about the number of people without savings, if they haven’t even provided a way to save this so-called money.  Well, I’m happy to inform you that they actually have provided a way to save.  There must be a few godly people in the government because they gave us a way to save money that can actually avoid much of the exposure to inflation.  In the United States, there are actually two ways.  They aren’t perfect, but they do appear to be a step in a good direction.  This information is so little known, and so important, that I really wanted to share it.

The Old Way

I’m going to assume that you are familiar with how a savings account accrues interest.  It’s important that you also understand how CDs or Certificates of Deposit work at the bank too.  A typical CD is a special account in which you give the bank your money for a dedicated amount of time with the promise from them to pay you interest.  If you take your money out early, there is a penalty.  The interest is calculated on the amount of money you initially put into the account, plus any interest accrued.  Now if that interest rate is less than the rate of inflation, you are actually losing money.  That’s because what you can actually buy with the money has become less over time, while at the same time, the interest didn’t increase fast enough to give you the same purchasing power your money had when you earned it.  So what did the United States Government do to help us in this situation?

The New Way

In 1997 the United States Treasury provided a new way of saving by issuing something called: “I Bonds. ” In order to understand what those are, you kind of need to understand what a normal “bond” is.  Stocks and bonds are really different even though they are often spoken of together.  When you “buy” a bond, you are actually loaning your money to someone.  Pretty confusing right?  It sounds like you are purchasing something when, in reality, you are loaning someone else your money!  Well, no matter what it seems like, that’s what it is.  When you buy a bond, you become the bank.  You can loan money to companies by buying corporate bonds.  You can also loan money to a government by buying government bonds.  That’s one way that United States Treasury finances their needs and they allow individuals or institutions to buy bonds.  One institution that does this is, … surprise…. your bank.  In fact, those CDs you get are often backed by government bonds.  I tell you this to help you understand that that these I Bonds are not really a new risk to you.  You are accessing the same United States Treasury only in a different way.  Let’s look at how a typical bond earns money for you.

100 Dollar Series I Savings Bond Image With Picture of Dr. Martin Luther King
source: TreasuryDirect.gov

A good old-fashioned bond used to be printed on paper, kind of like a dollar bill.  On the face of this bill, it had a value, like $100.  If you were to buy this bond at its face value you would loan the government $100 and they would give you this bill.   In those days, part of your loan agreement was that every six months or so, the government would pay you by sending you a coupon in the mail for all the interest they owed you on that money so far.  You could then go cash the coupon and use the money.  That was your interest for allowing the government to use your $100.    Another thing about your bill is that it would have a term associated with it that was recorded in a book somewhere.  That’s the amount of time you agreed to allow the government to use your $100.  When time is up, you can cash in your bill to get your $100 back.  As long as they are using your $100, they promise to keep sending you your interest as coupons in the mail.  Well, it’s pretty obvious that computers were bound to change this process a bit.

Buying Treasury Bonds Today

Now days, we use the same terms, but the paper is almost gone.  You still can buy a bond, but the coupon never gets sent to you, it just accumulates in an account.  In fact, the Treasury is willing to compound the interest now just like a CD.  Not only that, you can go to the Treasury’s web site and open an account online, just like using online banking.  Anyone with a Social Security Number is eligible.  Their website even has a clever name:

TreasuryDirect.gov

Yes, you have your very own online bank account waiting for you, but wait, there’s more.  Let’s go back to talking about I Bonds.  I Bonds, or more accurately Series I Savings Bonds, are what the Treasury calls “Inflation Adjusted Bonds”.  That’s right.  They’re bonds whose interest is tied to inflation.  That means that when inflation goes up, the interest rate on these bonds go up too.  Part of the interest calculation is connected to an index that follows the cost of goods in the United States called the CPI-U.  The CPI-U is a good topic for another article.  It’s good to know, for now, that your interest rate will go up when inflation goes up.  It’s also important to understand that what goes up, must also come down.  If inflation goes down (yes that would be deflation) the rate goes down, but the Treasury decided that they would not allow your bonds to ever go below your original amount.  That means you could actually make money in a deflationary time as well.  If you want to buy an I Bond, I have step-by-step instructions available at this website.

The Tax Problem

Now let’s say that you are convinced and you’re ready to put some of your savings into one of these I Bonds.  First, let’s talk about the down side.  I Bonds, unfortunately, are not protected from taxation by the IRS.  The United States Tax Code, for some reason, doesn’t recognize the fact that you already earned this money once.  Evidently, our congress believed that simply recovering your money’s lost value to inflation is a taxable event and that we owe money for that.  This means that you aren’t completely protected from inflation.  You will have to treat your interest on an I Bond as “income” and report it.  That’s the bad news.  This same bad news spans all investments including your bank account.  That’s not much comfort, but there are two tax advantages that you also need to consider as well.

First, we are allowed to defer reporting our interest to the IRS.  You can choose to not report your interest until you need to use the money.  The reason that this is significant is that you can wait to use the money for a rainy day, such as, a year when you don’t have much income.  For many of us, that will probably be during retirement.  At that time, you may not even be taxed, depending on what other income you have.  The other advantage is that these bonds are not taxable by state or local governments, like your bank account is.  So, even though taxes make things less than perfect when trying to shelter yourself from inflation, these I Bonds are one of the best things we have.

If you are interested in learning more about the effects of taxes on our inflation-protected savings, make sure to check out my post: Inflation Protection and Taxes.

Some Important Details

Now for some important details about I Bonds:  You can buy an I Bond for $25 or more at Treasury Direct, but you can’t buy more than $10,000 in any given year.  For many of us, that’s not an issue, but there are some who would like to save more than that.  Well, there is another trick… You can use your tax return to buy about $5000 more and guess what, you will get the paper certificates!  They are pretty cool, I have to admit.  There are more pictures of them at Treasury Direct.

Also, I Bonds are a long-term investment.  They act kind of like a CD in that there are restrictions about when you can take the money out.  You can’t cash them in for the first full year.  Also, you are penalized if you cash out before a 5 year term, but the penalty is not very bad.  You would have to give up the previous three months of interest, but that’s it.  Since you probably want to save anyway so that’s not a big deal.  The good thing is that you can keep your money in this bond for 30 years!  Yes you read that right.  Anywhere from 5 to 30 years, the government is willing to keep growing your interest rate with inflation and allow you cash out any time.  After 30 years the interest stops so it’s a good idea to cash it in and get a new one so you keep earning interest.

If you are looking to shelter more than that, or were wondering how you could do something like this in a retirement account, there is another option.  Check out my post:  Introducing Treasury Inflation Protected Securities (TIPS).  Thankfully, you can save money after all!

A “Neutral” Government?

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If philosophical neutrality is a fallacy, as I previously asserted, then building a government on this philosophy is a critically serious problem.  It appears to be a trend in governments across the world and it looks like a plan forged by the powers of darkness to me.

Peace does not come by the careful application of a fallacy.  It only comes through love and proper reasoning and that will mean that those who are thinking irrationally will have to be exposed.  That exposure doesn’t feel very good and some will fight to death over it, but I know from experience that true humility brings peace when we are finally willing to admit that we are wrong.

I was reading a report from a few years ago, about a Canadian ruling that was addressing the contents of prayers before meetings.  I am told that they were warning that there are prayers that may not be legal.  This appears to be a clear case of philosophical absolutism to me.  The United States has it share of the same kind of thing, as do other countries.

We may be tempted to assert that a government should stay out of speech related issues, but in reality, how can they?  A government must assert a philosophy of some kind or else it cannot function.  It has no choice.  The problem with what governments are doing is that the philosophy they are asserting is often irrational.  You can’t rationally assert a philosophy that assumes that no philosophy should be asserted. A government built on a foundation of irrationality is in no position to bring about peace or anything else.

With great sorrow, I see the problem again in the recent speeches of both President Trump and Vice-President Pence.  Their words sound like an attempt to respect all religions and creeds, even though it is obvious that they can’t.  In many of the same speeches, they rightly express that that there are certain creeds and religions that they do not respect, such as those that kill people or promote the destruction of the United States or disrespect its constitution.  Are these not creeds and religions?  This is confusing to say the least.  That’s not what made America great.

If they intend to go back to America’s foundation, they must return to the doctrine of Christian tolerance which asserts that although Christians don’t respect other creeds and religions, they do tolerate them to a degree in civil life, because that’s what Jesus expects us to do until He chooses to deal with them Himself.  Christian tolerance is built on the concepts of free will, grace (meaning favoring others when they don’t really deserve it), and the fact that Jesus is still alive and able to take care of the wicked without our help.  Christians desire that all men will come to know Jesus by willingly accepting His offer.  This means that, according to Christian tolerance, there can be no force when it comes to individual choice either.  This is the basis for American liberty and it also happens to be non-neutral.

So why is this a big deal?  It’s because it’s this issue that leads a people toward either liberty or tyranny.  If a government doesn’t have the authority over life, liberty and personal property, it definitely doesn’t have authority over the Creator that endowed those rights.  Any government that thinks it does that is indicating that it believes it is the supreme authority in certain matters.  Even if taking God’s place isn’t intentional, that’s what is being communicated and it leaves the door open to serious future problems.  Even now we are seeing the desire for philosophical respect drive the followers of various ideas to converge against Christianity, asking that it either comply or be silenced by “civil” government.  Since Christian tolerance is the basis for our liberty,  freedom as we know it is in serious danger.  What governments must do is to acknowledge that their right to rule comes from the God of the Bible, the true One that the Christians have acknowledged.

Other brands of neutral thinking have already been used in the west and have failed quite miserably at critical times.  Recall that Neville Chamberlain attempted to bring peace in his time using a method that would allow the UK to respect Hitler’s choices.  President FDR signed a peace agreement with Japan in a similar gesture right before we entered the war.  It’s important for us to remember how well those things worked out.  How about those Israeli peace agreements?

It’s important to ask ourselves: What good is peace if freedom is taken away?    There is a way for peace and freedom to coexist, but it depends on Christian philosophy, because that’s the only way they fit together without the government becoming an irrational tyrant.

 

Purchasing Health Insurance?

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If you are looking to purchase health insurance, and you are a Christian and go to church on a regular basis, I highly suggest that you look into Christian Healthcare Sharing.

Healthcare sharing between Christians is actually better than insurance in many ways.  It’s a huge group of people who are committed to sharing each other’s medical bills.  In a very real way, it’s a strong move back to what God intended Christians to do.

What got me looking for insurance alternatives was a move my company made to force us to an insurance company that was known to be participating in abortion.  I could not bear the thought of having even one cent of my premium used for someone else to have an abortion.  My move to Christian Healthcare Sharing was fundamentally a conscientious one, but I was also interested in it would cost.

I was surprised to find out that even with the significant amount of help my company provided, it was still a pretty good deal to go with Samaritan Ministries and that was a couple of years ago.  Some have recently reported a $500 per month reduction in cost.  I researched about four different ministries and Samaritan was the one that best aligned with my beliefs and my goals.  The thing that really stands out with Samaritan is that the organization doesn’t even touch your money at all.  You send your money directly to those who have needs, every month.  All Samaritan Ministries does is to direct your payments.  They keep track of where the needs are and whether or not they are legitimate and within the scope of the Samaritan Ministries Guidelines that all members must agree to.

I’ve been a member now for over two years and as Samaritan Ministries has grown, it has added new options.  There are options for young healthy members who don’t really want to spend much money, as well as options for the big family that really needs to know that all their emergencies will be met.

There’s even an option to share a few dollars more per year to have needs met should they exceed $200,000.  Needs in the millions have been successfully shared.  When you have that kind of commitment from other Christians, it is a very comforting thing.  It’s comforting to know that you are following God’s pattern in the Bible for how Christians should help each other.  It’s also critical to know that you are not participating in things that grieve God’s heart.

I encourage you to go to Samaritan Ministries and check it out and tell them that you heard it from Troy Taft.  That will help me too.  Thank you.

You can also check out the videos of what members have to say about Samaritan Ministries.