Money Management

TIPS may or may not fit into your overall financial plan. 

If rising interest rates have thrown you for a loop, you may be looking for a safe place to protect your cash. If so, Treasury Inflation Protected Securities (TIPS) are worth considering. However, before you do anything, make sure you understand the good, bad, and ugly features that come along with investing in TIPS.

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1. Understand how TIPS work

TIPS are a type of Treasury security. Unlike other securities, though, the principal is not fixed. That means the principal can rise or fall over time. Still, because they’re backed by the federal government, TIPS are considered a safe haven for investors looking to protect money from inflation.

The interest rate on TIPS is set every six months until they mature in 5, 10, or 30 years. Adjustments in interest rates are based on a version of the Consumer Price Index provided by the Bureau of Labor Statistics. TIPS can be held until maturity or sold before that time.

When TIPS mature, if the principal is higher than the amount you originally invested, you receive the higher amount. If it’s equal to or lower than your initial investment, you receive your initial investment back.

2. Familiarize yourself with the pros and cons

Like all investments, TIPS carry both attractive and less-attractive features.

Pros

Because they’re backed by the U.S. government, TIPS are a low-risk investment.TIPS protect investors from losing their money. They may not earn much, but they won’t lose value.TIPS help individuals on a fixed income protect their purchasing power.

Cons

TIPS almost always pay a lower interest rate than other securities.Interest earned on TIPS is taxable, even though the investor does not know how their investment performed until maturity.TIPS do not provide real income like an annuity or other investment can.Even financial experts have trouble determining why the real yield on TIPS move.

3. They may hedge against inflation, but TIPS are moody financial instruments

Due to the fluctuation in interest rates, TIPS returns are notoriously unstable. For example, according to Morningstar, intermediate-term TIPS dropped 12% in 2022.

That’s not always the story, though. TIPS have occasionally represented a more compelling investment option than their Treasury competitors. It’s that “will they or won’t they” that make TIPS somewhat erratic.

4. The 2022 drop may represent opportunity

Despite the ups and downs of TIPS, you always know that you’re going to walk away with — at the very least — your original investment while also keeping pace with inflation. You may not outrun inflation, but it won’t steamroll you either.

While a 12% drop in 2022 sounds scarier than showing up to a wedding in your underwear, the drop means you can park your cash in a TIPS bond at a cheaper price. While others are running out the door, you can sneak in and land a bargain. As Warren Buffett says, we should “be greedy only when others are fearful.”

To be sure, there are sexier investments out there, but few that protect you from the very real concern of inflation. This is one quality that TIPS have going for them.

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There’s no need to keep those items around to collect dust. 

Many people put a big emphasis on giving gifts during the holiday season — so much so that they’re willing to rack up credit card debt when purchasing them and being generous. And if you were the recipient of a string of holiday gifts this past December, then you should be thankful that so many people were kind enough to think of you.

But some of the gifts you received may have missed the mark. Maybe your aunt gave you a lovely wool sweater, only that’s a material your skin can’t stand. Or maybe you were given a box of gourmet chocolates, only you’re trying to cut out dairy.

Situations like these can be frustrating. But that doesn’t mean you’re stuck with holiday gifts you don’t want or can’t get great use out of. Here are some options to look at that don’t involve resigning yourself to a jam-packed closet of unwanted stuff.

1. Sell your gifts to willing buyers

Maybe you can’t stand the idea of a wool sweater rubbing up against your neckline. But another person might be eager to scoop up an item like that at a discount. That’s why it pays to take inventory of the gifts you don’t want and try to find buyers for them.

In many cases, you’re not going to get anywhere close to those items’ initial value, and you may have to be okay with that. In the case of our wonderful wool sweater, chances are, your aunt spent $50 at a department store, and you’re now looking at maybe getting $15 if you’re lucky.

But hey, that’s $15 you didn’t have before. And a $50 sweater that sits in your closet unworn isn’t going to offer you $15 or $50 of value — it’s going to give you $0 of value. So try not to get hung up on the fact that you’re “taking a hit” on the value of your gifts. Instead, remind yourself that you’re gaining cash you can use for different purposes.

2. Use them to make your friends’ lives better

Maybe you’ve sworn off dairy — either as a permanent thing, or in conjunction with a New Year’s resolution you made to improve your diet. Either way, if you have a friend who absolutely loves chocolate, make their day by handing over that box of gourmet sweets you don’t want to be tempted with.

It’s really a win-win. You won’t be taunted by that box of goodies, and your friend will get to enjoy some treats they may not be in a position to afford to buy for themself.

3. Donate them to charity

Food items can be tricky to donate to charity (though it always pays to check with your local food pantry, just in case). But if you have unwanted holiday gifts that aren’t food, donating them is almost always an option.

Not only is that a nice thing to do, but it could serve as tax write off. If you itemize on your tax return, you can take a deduction for non-cash charitable donations as well as cash donations. The only thing to keep in mind is that you can only deduct the fair-market value of the goods you’re donating.

But if you’re donating gifts shortly after having received them, and they’ve never been used, then you may be able to get away with deducting their full value (or, to put it another way, their fair-market value may be their full value). Ultimately, it’s best to check with a tax professional, but know that you do have options.

Unwanted holiday gifts don’t have to take up precious real estate in your closets. Instead, do something with them that will make you feel good or better your financial situation.

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It’s about making progress. 

Zero debt. An emergency fund. $1,000 in your brokerage account. All fantastic financial goals to kick off 2023. But is figuring out the finish line enough to carry you through your money marathon?

James Clear, author of bestseller Atomic Habits, thinks otherwise: “Goals are good for setting a direction, but systems are best for making progress.” Clear believes savers should focus on creating good financial habits — ones that stick around past the first week of January.

Why are goals less critical than habits?

Atomic Habits offers a few reasons that explain why habits are so important. The most compelling argument for prioritizing habits is the so-called “yo-yo effect,” when people lose motivation after completing their goals and back into old habits like overspending.

For example, someone who makes it their goal to add $1,000 dollars to their savings account might stop saving when they hit their number. They conditioned themselves for a brief sprint — not a lifelong marathon.

The point is to focus on building lifelong habits. Forming good financial habits has helped me pay down thousands in margin debt and stay healthy (the less often I’m forced to make insurance claims, the better). Even though I sometimes slip, my habits keep me moving forward.

Are you looking to build wealth in 2023? Here are three ways you might use the power of habits to reach your financial goals.

1. Automate your finances

Make good habits easy by automating the movements of money. Many of the best banking apps offer features that help you save without even trying. For example, the Chime app allows me to automatically send 10% of every paycheck directly to my savings account.

Say you make $40,000 per year. By the end of 2023, you’d have $4,000 saved. That’s enough to pay for a lifetime’s worth of Costco memberships. Best of all, automating your finances removes temptation from the equation. Out of sight, out of mind.

2. Partner up

Have someone hold you accountable for reaching your goals. James Clear recommends having accountability buddies with whom you share progress. An accountability buddy makes failure all the more unsatisfying, holding your feet to the proverbial flames.

For example, my mom asks me about my emergency savings once per month. Her skeptical eyebrow raises keep me motivated like nothing else.

Often, I fail to get to where I want to go. It’s a bummer, but the point isn’t to be perfect — it’s to recognize when you aren’t meeting your expectations. An accountability buddy forces you to recognize when something is wrong, allowing you to reflect and reorient.

3. Treat yourself

Make good habits satisfying by treating yourself when you engage. Every time you pay down credit card debt, eat a snack. Take a nap. Do what makes you happy, and do it right away. You’ll associate paying down debt with good vibes, making you more likely to stick with it.

Last year, I wanted to spend less on ordering food delivery. So each time I resisted the temptation, I wired $20 to my brokerage account. I didn’t just order less delivery; I also built up my long-term savings. Two birds, one habit.

Build long-term financial habits

The principles put forth in Atomic Habits apply to building long-term wealth. Goals are great, and I wouldn’t ditch them entirely, but habits indeed form the backbone of healthy money management. Without them, we lack the motivation to achieve our lofty ambitions.

You’re in control of your relationship with money. Consider whether you’re spending enough time building good financial habits.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Cole Tretheway has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Costco is wonderful, but it isn’t for everyone. 

As someone who shops at Costco on a regular basis, I can say with certainty that my credit card bills would be much higher if I didn’t have a membership. In fact, my family has an executive membership at Costco, which is double the price of a basic membership. But that executive membership more than pays for itself the form of cash back based on the amount of Costco shopping I do.

But even though I’m a huge fan of Costco, I do recognize that it doesn’t make sense for everyone to have a membership. And if these factors apply to you, a membership could end up being a big waste of money.

1. You don’t have a car

It’s one thing to pick up a handful of grocery items at the supermarket and walk them back to your home a few blocks away. But to shop at Costco, you pretty much need a car.

Even smaller staple items at Costco are heavy to carry because you’re buying things in bulk. And to really get the most out of your membership, you’ll want to buy multiple items when you shop there. If you don’t have a way to transport those items home, it really doesn’t make sense to join Costco.

2. You live alone

In my household, we go through two to three gallons of milk every week. We also tend to consume things like berries by the case. And for this reason, it makes sense for us to buy those things at Costco.

But in my household, there are five humans who need to be fed. And three of those humans are children, which means we tend to need a lot of paper towels to clean up the messes they commonly make. If you live alone, buying groceries in bulk could result in food waste. And you may not feel the need to buy 12 giant rolls of paper towels at a time when you only tend to go through one roll every two weeks.

3. You have little storage space

Even if you don’t buy perishable items at Costco, you’ll need room to store things like bulk packages of pasta, toilet paper, tissue boxes, and massive jugs of cleaning solution. If your home doesn’t have much storage space, then you may be better off skipping the bulk buying.

After all, the last thing you want is to have to stash stacks of paper plates in your hallway that you risk tripping over every time you walk down it. Also, living with clutter can mess with your wellbeing, and having to stick Costco purchases in random corners of your home could make your living space feel even more cramped.

Costco is a great place to shop if the circumstances warrant it. But a Costco membership really isn’t for everyone. And if you don’t have a car, housemates, or a decent amount of storage, then you may want to save your money on a membership and instead seek out deals at your local supermarket instead.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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You might struggle to afford life insurance if money is very tight. 

There are certain expenses in life you basically have no choice but to pay for. These include things like housing, food, transportation, and medication.

But what about life insurance? If you don’t have a policy in place, your loved ones could end up in a dire financial situation if you were to pass away unexpectedly.

But if you’re living paycheck to paycheck and are barely able to cover your basic expenses, you may not be able to afford life insurance. And in that case, waiting may be your best option.

You shouldn’t go hungry or take on costly debt to get life insurance

The purpose of life insurance is to protect your loved ones financially and make sure they can pay their bills in your absence. And it’s especially important to get life insurance if you’re the sole income earner in your household.

As such, it’s a good idea to prioritize life insurance over other expenses. That could mean canceling streaming services or even buying less expensive groceries in order to cover your premium costs.

But if you’re living paycheck to paycheck and truly have zero wiggle room in your budget for life insurance premiums, then buying coverage is something you might have to wait on. While life insurance is important, it’s not more important than putting a roof over your head and food on the table. And if given the choice between paying for life insurance premiums versus covering the cost of the medications you need to stay healthy, the latter should take priority.

Furthermore, you shouldn’t put yourself in a position where you’re forced to rack up costly debt just to carve out money for life insurance premiums. That could damage your finances.

A risk not worth taking

The whole purpose of getting life insurance is to make sure your loved ones have a means of paying their bills if you were to pass away. But if you can barely pay your bills now, and getting life insurance will compromise your ability to keep up with your current essential living costs, then you may be better off waiting to buy it.

If you purchase life insurance at a time when you really can’t afford it, you might quickly fall behind on your premiums, resulting in a loss of coverage. And that’s just a waste.

Instead, do your best to break free from the paycheck-to-paycheck cycle. That could mean reworking your budget, fighting for an overdue raise at work, or boosting your income with a side job.

Once you’re in a more stable place financially, it definitely pays to start shopping around for life insurance. Even if your circumstances improve, you may find that money is far from free-flowing for a while, so it pays to do your research and secure the coverage you need at the lowest possible cost. But until you get to that better place, you don’t want to add another expense to your plate that you could fall behind on.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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