Nicole Lapin

It's applied to a principle that adjusts with inflation every single day.

So if inflation rises, your principle goes up.

And since your interest payments are calculated based on that adjusted principle, your interest payments will go up if your adjusted principle goes up too.

When that bond matures, you get the inflation adjusted principle back or your original investment, whichever is higher.

So deflation is not going to hurt you, but that's an episode for a different day.

I know this might sound complicated, but here's an example, hopefully to clear it up.

If you buy $1,000 in tips and the interest rate is 1%, you get $10 in interest payments.

If inflation stays the same, nothing happens.

But this is the really good part.

When inflation goes up, let's say it goes up 5%, your bond is then worth $1,050 and then you're paid.

goes up as well to $10.50 instead of just $10.

I know the 50 cents doesn't sound like a lot, but if you own more tips and inflation gets insane, then that is real money.

Right now, 10-year tips recently auctioned with a real yield of a little over 2% above inflation.

So that means over the life of the bond, you're earning 2% on top

of whatever inflation does.

So if inflation continues to be 4% for the next decade, your total return would be roughly 6%.

That is meaningful long-term money.

Tips come in 5, 10, and 30-year maturities.

If you don't want to manage individual bonds, I totally get that.

You can buy a tips fund through an ETF like Vanguard's VIP SX or iShares TIP, which gives you diversified exposure to tips across different maturities.