Se dice que todos deben acumular préstamos. ¿Qué significa entonces?

Tú prestas dinero para comprar algo cuando solicitas crédito. 

Sin embargo, debes pagar el préstamo además del interés.

Prestamos dinero si no podemos o no queremos pagar el costo total del artículo que queremos inmediatamente.  

Además, prestamos dinero para gastarlo en cosas que nos ayudan a ganar más dinero, como comprar acciones o comprar una casa. 

Junto con la deuda se incluye la calificación de crédito, la que es un indicador de la confiabilidad de los prestatarios.

 

También tengo deudas y no es una situación favorable. Asumir deuda es un riesgo aunque se utilice por un buen motivo como ir a la universidad, comprar un automóvil o comprar una casa. Al solicitar préstamos, tengo que preocuparme por mi calificación crediticia.

 

Me di cuenta de que me daban buenos tratos cuando mi puntuación era más alta que baja. 

Recordé cuándo me dieron el primer préstamo. Mi puntaje no era alto durante ese tiempo. 

Sólo era un puntaje aceptable, lo cual significaba que mi calificación era entre buena y mala. 

La puntuación FICO es el puntaje de crédito que la mayoría de las personas conocen. 

¿Por qué la calificación de crédito es tan crucial?

Es para mostrar a los prestadores cómo manejas tus finanzas, especialmente si ya tienes deudas. 

“Fair Isaac Company” de California se conoce como FICO. Esta empresa determina el riesgo de los consumidores por utilizar su sistema de puntuación. 

¿Cómo evalúa FICO la solvencia de un cliente?

La compañía inspecciona los reportes crediticios de Equifax, TransUnion y Experian. Esos 3 nombres son las agencias de crédito más bien conocidas.

 

Y FICO usa números de 3 dígitos para monitorear la nota de cada cliente según el tipo de deuda. Los números van de 300 a 850.

 

¿Cuál es el significado de estos números?

¡Tú ya sabrás! La puntuación más baja es 300, mientras que la más alta es 850.

Para ser solvente, debe tener una puntuación de al menos 700 y mucho menos de 720. Por supuesto, siempre es mejor aumentar tu puntaje hasta 750 o más, lo cual es un rango fantástico.

Tú puedes ahorrar mucho dinero en el futuro por eso. De hecho, puedes ahorrar cientos a miles de dólares.

 

Si tienes una puntuación FICO alta, particularmente una que supere los 720, pagarás menos interés en todas tus deudas. Por lo tanto, tendrás que gastar más dinero si tienes un puntaje bajo. Si tienes una puntuación alta, gastarás menos dinero.

Examinemos a dos compradores. La persona A reúne los requisitos para un préstamo hipotecario a plazo fijo de 30 años con un interés del 5% con una puntuación FICO de 760. Después, la persona B recibe el mismo tipo de préstamo con una tasa del 8% con una puntuación de 659. Cada persona presta $150,000 para comprar una vivienda.

Si hacemos los cálculos, la persona A paga menos cada mes ($805.23) mientras que la persona B paga más todos los meses ($1,100.65). ¡Esa es una diferencia mensual de $295.42!  ¡La persona A ahorra $106,351.20 más que la persona B durante la vida del préstamo porque la puntuación de crédito de la persona A es más alta!!

¡Uno puede mejorar su puntaje crediticio aunque administre mal su dinero!

En un momento dado, mi puntaje de crédito no me satisfacía. Por lo tanto, yo quería aumentar mi puntaje lo más rápido posible y lo hice. 

¿Cómo lo logré? Voy a explicarte lo que debes hacer para mejorar tu puntaje FICO. 

 

1. Paga todas las cuentas a tiempo, en particular toda la deuda

Todos estamos conscientes de que es necesario pagar todas las cuentas a tiempo. Estos gastos afectan más nuestra puntuación de crédito cuando pagamos nuestras cuentas mensuales del préstamo y de la tarjeta de crédito. 

Evita los pagos atrasados para ir por buen camino de mejorar tu crédito. 

Pagar la deuda a tiempo tiene el potencial de mejorar su puntaje de crédito en más de 40 puntos.

 

2. Paga completamente las facturas de la tarjeta de crédito todos los meses

Debes pagar todo el saldo de tu tarjeta cada mes. Cuando solicitas un préstamo o crédito, los prestamistas quieren ver que tu deuda de tarjeta de crédito es baja. 

Le demuestra al acreedor que eres responsable financieramente y que gastas bien. Además, le demuestra que tienes la capacidad de pagar cualquier deuda que se te presente. Los prestamistas prefieren que pagues el monto total en lugar de hacer pagos más pequeños.

El saldo de la tarjeta de crédito continuará aumentando incluso si solo pagas la cantidad mínima. Dado que no pagas el saldo completo, la deuda sigue creciendo. Además, los intereses seguirán sumando a cualquier monto que no se pague. 

Cuando los titulares de tarjetas de crédito dejan que su deuda aumente durante un período prolongado, les cuesta trabajo pagarla. 

Los consumidores son de alto riesgo si tienen saldos de deuda más altos.

 

3. Obtén un límite de crédito alto o algunos grandes préstamos

Tener un alto límite de crédito es importante, pero no es bueno tener demasiadas tarjetas de crédito.

Los prestamistas ven negativamente a las personas que tienen una gran cantidad de cuentas de tarjetas de crédito en su informe. 

Es menos probable que pagues la deuda si tienes muchas tarjetas de crédito. 

El ciudadano estadounidense promedio tiene entre 3 y 4 tarjetas de crédito. 

No será malo si puedes pagar completamente los saldos todos los meses para evitar acumular deudas.  

Si decides obtener más de una tarjeta, debes obtener 3 al menos. 

Después de pagar tus deudas a tiempo, también puedes pedir un aumento en tu límite de crédito. Sin embargo, debes esperar hasta que tu empleador te pague el aumento de sueldo. 

Obtener préstamos más grandes como préstamos estudiantiles e hipotecarios, se ve bien en el informe de crédito, especialmente si haces los pagos regulares desde hace tiempo. 

 

4. Mantén una tasa de utilización de crédito baja

 

¿Qué significa eso?

 

Vamos a entrar en detalles.

 

Primero, ¿qué es la utilización de crédito?

 

Es como se expresa.

Es el número de veces que usas tu tarjeta de crédito durante un período de tiempo.

Los prestamistas y las empresas de tarjetas de crédito quieren saber cuántas veces usas la tarjeta de crédito para pagar. Para solucionar esto, utilizan una parte del límite de crédito de esa tarjeta.

Como regla general, tu tasa de uso debe ser inferior al 30%.

Es para demostrar que no eres un consumidor de alto riesgo.

Los prestamistas te considerarán un prestatario de alto riesgo si superas el 30%.

Si tu límite de tarjeta es de $30,000, no debes gastar más de $9,000 al mes (30% de $30.000).

 

Las personas de clase media y alta que se ganan la vida decentemente tienden a tener saldos de tarjetas de crédito más grandes. 

 

Lo bueno es que la mayoría de los ciudadanos estadounidenses tienen calificaciones crediticias favorables.

¿Es necesario preocuparte si tienes un buen crédito a pesar de tener muchas deudas? 

 

Si te ganas bien la vida y tienes mucho dinero a mano, no tanto.

Si manejas tu dinero con cuidado, también estarás en buena forma financiera.

Sin embargo, debes preocuparte si tu patrimonio neto o tus ingresos son bajos. Puede ser que no pagues la cantidad de deuda o crédito que tienes si ganas menos dinero.

Aunque es prudente mantenerse dentro del límite de crédito, es mejor usar menos del 30% de él. 

5. Obtén un historial de créditos y deudas

Por ejemplo, digamos que el prestamista examina 2 solicitantes diferentes para un préstamo.

El solicitante #1 no tiene deudas ni tarjeta de crédito, pero gana alrededor de $70,000 a $80,000 al año. Además, este solicitante ha estado pagando todas las facturas mensuales a tiempo.

Luego, el solicitante #2 tiene los mismos ingresos que el primer solicitante. Sin embargo, el segundo solicitante tiene $30,000 de un préstamo estudiantil, un préstamo de automóvil y una deuda de tarjeta de crédito. La persona #2 también paga íntegramente el saldo de la tarjeta de crédito y los otros préstamos todos los meses.

¿Quién será el prestatario más fiable? Si mencionas a la persona #2, tienes razón.

Los prestamistas tienen más información sobre cómo la persona #2 maneja su dinero, pero no tienen mucha información sobre la persona #1. 

6. Prolonga la duración promedio de tu crédito

También es importante la duración promedio del crédito.

¿Qué es la duración promedio del crédito?

Simplemente suma la cantidad total de años que has tenido tarjetas de crédito y luego divide la cantidad total de años por el número de tarjetas que tienes.  

Por ejemplo, digamos que tienes 3 tarjetas de crédito, pero las obtuviste en el mismo mes y las usas desde hace 6 años. En este caso, la duración promedio del crédito será de 6 años.

Calcula la cantidad de años que tiene cada tarjeta (6 años) y luego súmala (18 años en total).

Después, divide 18 por 3 (o por las 3 tarjetas), lo que da 6. En este caso, el historial crediticio promedio dura 6 años. Pero, ¿qué pasaría si obtuvieras las mismas 3 tarjetas de crédito varias veces?

Si has poseído tu primera tarjeta por 6 años, la segunda por 4 años y la tercera por 2 años, la duración de tu crédito será de 4 años. Suma los años juntos (6, 4 y 2) lo que te da un total de 12. Entonces, divide 12 por 3 (ya que tienes 3 tarjetas) lo que equivale a 4 años. 

Por lo tanto, la duración promedio del crédito disminuirá.

No obstante, existe una sorpresa. Después de obtener tu tercera tarjeta, tu puntuación FICO disminuirá porque la duración promedio descenderá. Si no hubieras obtenido la tercera tarjeta, el promedio habría sido de 5 años (6 años más 4 años = 10 dividido por 2 tarjetas = 5 años).

No necesitas obtener todas las tarjetas al mismo tiempo, pero es mejor obtenerlas dentro de poco. 

Si tienes un largo historial crediticio, mejorarás tu puntuación e historial crediticio. 

7. Asume la deuda garantizada más que la deuda sin garantía 

El tipo de deuda que tienes también es importante.

Déjame explicártelo más. 

 

Existen dos categorías de deuda en el mundo prestador 

El primer tipo de deuda es la deuda garantizada, en la que el prestatario debe renunciar a un activo como garantía si no puede pagar el préstamo. La garantía puede ser una cuenta bancaria, acciones, una casa, un automóvil u otros bienes valiosos.

La deuda sin garantía es otro tipo de deuda en la que no hay garantía. Dado que no hay garantía, esta deuda es la más arriesgada.

No es una sorpresa que los prestamistas prefieran el crédito o los préstamos garantizados más que los sin garantía porque los acreedores pueden confiscar algunos de los bienes del prestatario si el prestatario no puede pagar sus deudas. 

Las hipotecas son un buen ejemplo de un préstamo garantizado ya que la casa suele ser la garantía. Si el propietario no paga el préstamo, el prestamista puede recuperar la casa, venderla y usar el dinero de la venta para pagar el préstamo. 

 

 

 

 

Los préstamos hipotecarios son un buen tipo de deuda porque una persona puede utilizar el dinero para invertir en una propiedad.

 

Por otro lado, las tarjetas de crédito suelen ser deuda sin garantía porque muchas no vienen con garantía. Son un mal tipo de deuda porque la persona presta el dinero para comprar cosas que quiere o necesita. 

No implica que no podamos aprovechar las tarjetas de crédito. Para aprovecharlas, debemos usarlas con cuidado. Si intentas obtener algunas tarjetas de crédito, es mejor que obtengas la de garantía en lugar de la sin garantía. 

Es que los prestamistas no tienen una perspectiva favorable de la deuda sin garantía.

 

 

Estos son los pasos que debes seguir para mejorar tu crédito. 

 

 

El puntaje crediticio es crucial porque le otorga ciertos beneficios al prestador:

• Para adquirir una nueva casa

 

• Para comprar un automóvil nuevo

 

• Para financiar y establecer una empresa

 

¡Es muy importante mejorar tu puntaje de crédito por eso!

 

Tú puedes obtener un informe crediticio anual gratuito en www.annualcreditreport.com 

 

Las tres principales agencias de crédito pueden ayudarte a evaluar tu calificación crediticia: 

Equifax www.equifax.com 

TransUnion www.transunion.com

Experian www.experian.com 

(Si haces clic en estos enlaces, no recibiré ninguna compensación. Utiliza estos enlaces para tu propio beneficio.)

 

 

 

One of the most important matters we deal with in our financial lives is our credit.

 

Credit is the ability to borrow money to pay for some costs.

 

Why do we use credit?

 

We use it to buy things we want or need but couldn’t otherwise afford.

 

But why is credit so important?

 

It gives us the chance to borrow money when we need to.

 

This determines if we can get approved for loans and credit cards.

 

We can lose that opportunity to borrow if we hurt our creditworthiness.

 

When I was younger and first started paying bills, I began to learn about the real world.

 

During that time, I made my fair share of mistakes, especially ones that hurt my FICO score.

 

I’ll tell you the common mistakes that can hurt our credit rating.

 

1. Late payments and unpaid bills

 

This one is obvious. Bills and more bills are a normal part of our lives. It’s a responsibility we can’t avoid.

 

What we know or must know is how paying our bills affects our track record.

 

Those credit card and loan payments have the biggest effect on our credit score.

 

Although the other bills don’t help our credit score, not paying them on time can hurt it.

 

They get sent to collections if they are overdue by 30 to 60 days.

 

If you don’t pay what you owe in full, your creditworthiness won’t look good.

 

Your FICO can drop as much as 50 to even 100 points due to late payments!!

 

It’s better to pay the bill collector the full amount than a part of it even though you can settle for less.

 

Keep in mind that paying the minimum amount on your credit card doesn’t get you off the hook!

 

Choosing small payments over full ones only adds to the debt. So, the cardholder will have trouble paying off the amount.

 

2. Excessively applying for credit or debt

 

When you ask for credit or a loan, your credit score goes down right away because the lender has to check your credit report.

 

We know that it’s never a good thing to be late on payments or not pay off debts.

 

But it’s also bad when you continue to pile on debt, and your credit score keeps going down as a result.

 

When this happens, your credit history won’t look so great.

 

Now, it’s not a bad idea to borrow money to buy a house, get a new car, or build up your credit. Just remember that your score will briefly drop. But that won’t last as long as you keep paying those regular bills.

 

Still, it’s not good to keep asking for more and more debt, especially debt you don’t need at all. Your credit score will keep going down because more and more people are checking your record.

 

3. Applying for loans and credit with bad timing

 

This is a big deal!

 

It does matter when you seek debt.

 

You see, the length of your credit history, or the average age of your credit, is one of the things that affects your FICO score.

 

What does that mean?

 

It’s the average time you’ve had credit.

 

If you got 3 credit cards in the same month and held each one for 6 years, your average credit age would be 6 years.

 

Say you get those same 3 credit cards. But instead, you’ve had your 1st card for 6 years, the 2nd one for 4 years, and the 3rd for 2 years. In this case, your average credit history would be 4 years. We would add the years together (6, 4, and 2) which would give us 12, and then we divide 12 by 3 (for 3 cards) to get 4 years.

 

The problem is that your FICO score would go down along with your average credit year. Both move together in the same direction.

 

It’s not a good idea to get credit cards at different, more spread-out times like this. The reason for this is that this will reduce your average credit length and FICO score for each card that you get.

 

Your credit background and score will be better if your average credit age is longer.

 

But your credit record and score will be less good if your average length of credit is short or getting shorter.

 

4. Canceling credit card accounts

 

Yes! If you cancel your credit cards after getting them, your FICO score will dip.

 

This may be a surprise for some of you!

 

Sure, you may want to cancel a credit card you’re not using, but this can actually work against you.

 

How so?

 

We already know that the average age of your credit is one of the things that goes into your credit score.

 

Consumers often make the mistake of closing out a credit account. This will make their score worse.

 

When you close a credit card account, your score and average credit age go down. Your average credit age also affects your credit score.

 

Let’s use the same case as before. You still have the same 3 cards, but this time you canceled the 3rd one you had for 2 years. What did this cancellation do? It actually cut your credit length to 3.33 years. We determined this by adding the lengths of the 1st and 2nd cards and including 0 years to the 3rd card.

 

Wait, why are we associating 0 years to the 3rd card?

 

You used to have this card, but you canceled it. So, you don’t have an account on it anymore.

 

But couldn’t we just leave out the information from the 3rd card when we figure out the average length?

 

It’s not quite that simple. When you close a credit card account, you also close the credit limit that came with it. One way to improve your credit report is to have a bigger credit limit. If you lower the credit limit, your FICO score can go down.

 

Remember that your credit history keeps track of everything you owe and how much credit you have. So, it will also show on your report that you closed a credit card account.

 

You pretty much have to maintain the credit cards you get for eternity! That’s like signing your life away to the exact cards you choose! (Ok, that might sound a little extreme.)

 

But you get what I mean. You must keep the cards you pick and never close your accounts.

 

When you apply for credit, do research on the cards that would suit you the best and keep those cards as long as you live!

 

5. Unable to pay back the debt

 

The worst financial situation is when you have so much debt that you can’t make the payments.

 

This can lead to a default or, worse, bankruptcy!

 

People often make the mistake of buying things on credit without having enough money to pay them off.

 

It’s never a good sign when the rate at which you buy things on credit goes up faster than the rate at which you make money. This is how you fall behind on your bills.

 

Credit card owners often think of their cards as a sign of their wealth. They can easily get caught into this debt trap if they don’t spend wisely and control their buying urges.

 

People who pay mostly with credit cards are more likely to overspend than those who pay with cash.

 

Another circumstance that often creates financial difficulties is job loss or job hopping.

 

If you change jobs a lot, this can affect your credit history.

 

Yes, I know that sounds strange.

 

But keep in mind that if you want to build up your credit, you need a steady source of income.

 

When you apply for debt or credit, lenders don’t like to see that you’ve been changing jobs a lot in short periods of time. If they see this, they’ll question how stable your income is.

 

This is important for them because they want to know that consumer’s income range.

 

If a person hasn’t worked for the same company for years, it’s hard to know if he or she has a stable source of income. To pay off all debt, you need income, but it’s easier to make a budget when you know your income limit.

 

But what if you’re unemployed?

 

How will you be able to pay back your debts if you aren’t making money?

 

This can start a dangerous cycle that makes it hard to pay back debt, which will hurt your track record and FICO score.

 

These are the most common mistakes. Because of this, it’s important to get the word out. This can help us all make smarter decisions for how to deal with our credit.

 

Don’t feel bad if you’ve made any of these mistakes! I, too, have made them and learned from them.

 

Check out this post here if you want to learn how to build up your credit quickly:

 

In the previous article about making money during a recession, we learned about some good assets to hold in a bearish market.  

 

But guess what?

 

There are more assets you can benefit from during difficult times! 

 

These investments can give you some financial security when everything is looking dire.

 

Let’s see what these assets are!

 

1. Real Estate

 

In a recession, the prime rate rises, so more people rent instead of buying. Leasing is a great way to make passive income.

 

Benchmark rates rise with inflation and the Consumer Price Index (CPI). House prices also go up during inflation, and property owners will want to take advantage of the price hikes. 

 

The best time to sell the property is when inflation has occurred, but the prime rate has not gone up yet. (Inflation does not immediately increase the prime rate.)

 

Even if you do not sell the property, the monthly rent will provide consistent cash flow during a recession. If anything, you can raise the rent during inflation.

 

Also, if you live on the property you held for at least 2 years, you will not have to pay taxes on the capital gains. However, you must have that property as your primary residence, not as an investment property. 

 

In hard times, renting a property can generate income. More people will rent as rates rise, making it harder to sell a home. This lets you lease the space and get paid.

 

2. Gold

 

Gold prices usually climb during recessions.

 

This commodity has outperformed other asset classes in some of the worst economic times, producing double- to triple-digit returns.

 

Inflation increases gold’s value, but disinflation or deflation lowers it.

 

Basically, gold becomes expensive when everything else does. 

 

You must consider that gold’s prices may plummet when the stock market becomes bullish. 

 

It is best to sell your gold when the economy speeds up. 

 

 

3. Mutual Funds

 

If you wish to invest less money but gain access to recession-proof asset types, mutual funds are a great option.

 

Mutual funds offer instant diversification of assets without the hassle of choosing stocks, bonds, etc.

 

In this case, you’re paying and trusting another person to pick the winning assets for you.

 

There are various types of funds you can put your money in.

 

For instance, stock funds only invest in stocks, bond funds focus exclusively on bonds, Real Estate Investment Trusts (REITs) concentrate on real estate, and so on.

 

Because mutual funds typically hold hundreds of different stocks, bonds, and other securities from many industries, you should own shares of one of these funds. 

 

If you were to own individual stocks and/or bonds in your portfolio, a good rule of thumb is to own 50 to even 100 different securities in all sectors to be well-diversified.

 

Stock and Bond Funds are great choices to achieve this diversification without spending a lot of money.

 

During an economic downturn, the best stock funds to look into are the utilities funds, natural resources funds, and healthcare funds. 

 

For bond funds, I would look for the ones that invest in the corporate bonds of reputable companies and the municipal bonds of the bigger cities. Remember, muni bond funds pay federally tax-exempt and potentially state tax-free interest income.

 

If you want to take on less risk, you can invest in money market funds, which are highly liquid funds whose prices rarely change. Its Net Asset Value (NAV) is generally set at $1 per share, and you collect monthly dividend income. These funds invest in short-term securities such Treasury Bills, Commercial Paper, CDs, Banker’s Acceptances (BAs), etc.

 

On the condition that you want tax-free monthly income, I suggest investing in municipal money market funds. You do not pay federal taxes on the dividends and can even be exempt from state and local taxes. 

 

If you rather go for real estate, apartment-focused REITs are the best ones to choose during the recession. Many people prefer to rent rather than to buy to avoid paying high mortgage interest when the market rate is high. So, it will be less costly to rent a place for the time being.

 

There are also precious metal funds. Yes, even gold funds exist! Small gold investors should consider these funds. You are still getting access to gold, but indirectly since you’re actually not holding these coins yourself.

 

You do have to trust the portfolio manager’s selection of investments in accordance with your financial goals.

 

You also must worry about the fees each fund imposes because these costs can eat away at your returns.

 

Some mutual funds offer Dividend Reinvestment Plans (DRIPs) to help boost your returns and offset the costs. Also, there are mutual funds that pay capital gains distributions in addition to dividend income and profits made from redeeming the shares.

 

4. Apply dollar cost averaging

 

As with any stock, defensive stocks are more valuable when held long-term (5 years or more).

 

With brokers offering the option to buy fractional shares of a stock, you can use dollar cost averaging, in which you set a small amount of money aside to invest in these stocks periodically, whether it’s weekly or monthly. 

 

You can also implement this strategy when investing in mutual funds. The shareholder also has the option to choose the Dividend Reinvestment Plan (DRIP). This plan allows the shareholder to reinvest any earned dividends back into stocks and mutual funds if he or she wants more shares instead of quarterly cash income. 

 

Dollar cost averaging is a useful strategy, especially during these difficult economic times, because you avoid buying the shares at the worst possible time. 

 

In a downturn, you can expect stock prices to fall steadily. However, by investing money little by little at different times, you might buy when prices drop. 

 

You will also be buying at better times during price appreciation.

 

By doing this, you avoid putting all of your eggs in one basket at the worst possible time.

 

For example, if you invest $1,000 in McDonald’s stock at $100 per share, you would acquire 10 shares. But if the stock fell to $80 in a couple of months, you would be losing $200. 

 

An investor may get a different result if he or she purchases shares periodically.

 

For instance, you spent $10 in January when the stock sold for $100, then you invested another $10 in February when it was selling for $90, then another $10 in March when the shares were on sale for $95, and so on. You invested a small amount of money at different times so you could avoid spending all of your nest egg at the worst time.

 

Do not forget about DRIPs, where you can turn your dividend income into shares. This is a very effective tactic because the shares have a variable amount in contrast to cash dividends, which have a fixed dollar amount.

 

Instead of receiving $3 in cash dividends this period, you may earn 0.03 fractional shares of McDonald’s stock at $100 per share. (The 0.03 comes from $3 divided by $100.) Then those shares appreciate to $200 in several months, and you sell them at that time! That 0.03 fractional shares would be worth $6 at that time if you chose DRIPs.

Also with DRIPs, you get more and more shares throughout the year. Imagine how much more money you can gain because you reinvested all of your dividends into more shares!

If you chose the cash dividend option, you would have just collected $3. 

You see the difference between choosing DRIPS over cash dividends?

 

That is what makes the difference between dollar cost averaging and investing your nest egg all in one basket.

 

It is also better to employ dollar cost averaging on defensive stocks which tend to outperform other equity types during market corrections or a Bear Market.

 

5. Collect Qualified Dividends

 

When you invest in stocks or mutual funds, I would buy them at a certain time. Why is that?

 

You must purchase the shares within a specific holding period to collect qualified dividends. 

 

Qualified dividends are dividends classified as long-term capital gains. 

 

With qualified dividends, you are receiving tax-advantaged income. You will pay less taxes than you would on ordinary dividends. 

 

If you are in the 10% to 12% tax bracket, you will not pay taxes on them. That is better than paying 10% or 12% taxes on this income.

 

If you are in the 37% tax bracket, you pay 20% tax on qualified dividends. If the dividends were ordinary, you would have paid 37% instead. You saved yourself from paying 17% more on taxes if you bought the shares at a certain time.

 

That is a big deal when you take into account the after-tax return, which includes the inflation rate. 

 

For high earners, you may pay an additional 3.8% tax on any dividends if your Modified Adjusted Gross Income (MAGI) is $200,000 ($125,000 or more if you file Married Filing Separately on your tax return). 

 

In that case, your 20% tax becomes 23.8% on qualified dividends. It would have been 40.8% on ordinary dividends (37% tax plus 3.8% additional tax).

 

So, what is the holding period, and how does it determine the type of dividend?

 

First, you need to determine if you hold common or preferred shares.

 

Common shareholders are allowed to vote for the company’s board of directors but do not get priority for dividend payments.

 

Preferred shareholders are usually not allowed to vote but get priority over common shareholders in receiving dividends. They are more likely to receive any full dividend amounts owed to them than the common shareholders.

 

You must acquire the common shares of the stock or fund in a 121-day holding period, 60 days before the ex-dividend date for common stock. You must hold the shares for 61 days or more.

 

For preferred shares, you have to buy the shares 90 days before the ex-dividend date during the 181-day holding period. You will have to hold the shares for 91 days or more.

 

The ex-dividend date is the date the period’s dividend payments are recorded. You must buy the shares at least a day before the ex-dividend date to be entitled to this period’s dividend payments. 

 

If you buy on the ex-dividend date, you will not receive the dividend payment this period. Instead, you will receive dividends for the period after.

 

The ex-dividend date is often set a month before the dividend payment date.

 

Keep in mind that the period of time you buy the shares determines if you will receive ordinary or qualified dividends.

 

So, you buy Company E’s stock, and you see that its shares are common.

 

The ex-dividend date is March 7, and the dividend payment date is April 7.

 

You purchased Company E’s stock on February 29, which is 8 days before March 7. You are entitled to April 7’s dividends, but they are ordinary dividends because you did not buy the shares 60 days before the ex-dividend date. Therefore, you will pay regular income tax on these dividends.

 

If you had bought the shares on January 3, you would have acquired them more than 60 days before March 7. So, you will be receiving qualified dividends on April 7, and you can enjoy the tax advantages that come with them.

 

Generally, big brand companies pay common dividends.

 

It is also important to know that you will not receive qualified dividends if you acquire the shares from an exercised options contract or from an employer’s stock option plan. 

 

We must always discover ways to financially adjust to the unpredictable economic future. 

 

Even when the economy is bad, you can still keep your money safe and earn more. Knowing that you can benefit from the downturn makes it less stressful to worry about the economy. 

 

We focused more on investment instruments that are likely to perform well during and after a recession. 

 

I recommend reading this post if you want to know how to protect and make money during inflation or hyperinflation if there are no positive signs of a bull market.

 

Recessions often raise concerns about another Great Depression. 

 

Of course, you can still protect your wealth and make money during market corrections. One of the ways to preserve your financial well-being is to invest in recession-proof assets.

 

These assets perform the best when the market is down, and also when people expect disinflation, deflation, or a bullish trend in the market in the near future.

 

In this article, I will discuss how to profit and preserve your wealth during market corrections while anticipating a bull market.

 

By investing in and researching the different types of securities, I noticed which ones performed best during more difficult economic times.

 

1. Defensive Stocks

 

Stocks tend to perform at their best when held for 5 years or more as they outpace inflation over time.

 

Stocks average 10% on annual returns. So, if the average annual inflation rate is 3%, stocks will produce 7% on real returns (10% return minus 3% inflation).

 

Stocks, especially those in the S&P 500, tend to return 10% a year while inflation averages 3%. In this case, real returns are at 7%.

 

During a recession, the best stocks to buy are the defensive ones. They “defend” themselves well against economic opposition, hence their name. These stocks include consumer staples, utilities, energy, and healthcare companies.

 

McDonald’s and Wal-Mart are examples of good consumer staples stocks. These multinational companies are both well-known in the United States and around the world. 

 

Even during inflation, these two companies offer foods at relatively low prices compared to their competitors, which is why many people shop at these places. Also, both companies have hundreds of stores nationwide and worldwide. People will mostly buy things they need, such as food, when prices go up. 

 

Utilities stocks and energy companies are great investment choices during recession because we all need electricity for our lights, TV, internet, etc. I would say that many of us could not live without these things. Also, we use transportation which requires gas and oil in addition to electric batteries. 

 

You may want to consider investing in healthcare companies because they often perform well in volatile markets. Everyone visits the doctor’s office and buys medicine.

 

These four sectors usually outperform other stocks when the market is down. So, it’ll be better to invest more money in them when there’s an economic slowdown.

 

When you invest in defensive stocks, add blue-chip stocks, like Microsoft, Amazon, or Walmart, to your portfolio because they provide stability. These large companies have a history of revenue growth and consistent dividend payments. It’s even better if these companies are from those four sectors mentioned.

 

2. Corporate Bonds

 

Corporate bonds are good investments during this stretch. Their prices do fall along with their corresponding stocks. Not only is this period a good time to purchase these bonds, but these securities have a fixed dollar amount you collect at the maturity date known as the face value. You’ll profit from this investment as long as you buy the bond at a discount, below its face value. If the price rises, you can also sell the security on the secondary market for a gain.

 

Bonds’ prices tend to be less volatile than stocks, even during the Bear Market. If you compare your stock portfolio to its bond counterpart, you’ll see that the bond holdings will probably lose less value than those in equities. In some instances, the bond portfolio has produced returns during market corrections even though the returns are smaller. 

 

When a bull market occurs, bond prices will appreciate since the Fed has already lowered the market rate. A bond’s market value is subject to interest rate risk. Bond prices are likely to fall since the benchmark rate is higher amid a recession. 

 

If the Fed’s rate is higher than the bond’s coupon rate, the bond is less valuable because investors are likely to buy bonds whose interest rates match the market rate. During a rising market rate, the newly issued bonds will have a higher coupon rate than the bonds in the secondary market.

 

When market interest rates drop, bonds become more valuable. The newer issues will have a lower coupon rate while the older, existing bonds will have a higher interest rate, making them more valuable.

 

We saw this during the COVID recession when the Fed Funds rate fell all the way to 0.25%. In the secondary market, bonds were offered at a premium, or above the par value, because the market rate hit an all-time low around that time and also during the 2008 crisis.  

 

A good indicator that the Fed will lower the rate is when it lends lots of money to Uncle Sam, or buys a lot of Treasury Securities. Consumers will borrow and spend more at lower rates, boosting the economy. Also, corporations will happily issue bonds at lower interest rates.

 

So, investors will have to look into the secondary market to find bonds with higher interest rates. The problem is that these bonds will be more costly because their prices are at a premium, and their coupon rates will be higher than the market rate. This is another good reason to hold onto these assets during economic turmoil.

 

The key is to buy them from very solvent companies, such as blue-chip businesses. It is smarter to buy bonds with the highest credit ratings, which are AAA and AA (Aaa and Aa from Moody’s).

 

If you buy any bonds, the best ones to always purchase are those with sinking fund provisions. 

 

Why is that important?

 

The sinking fund is money the company puts away periodically while letting the interest accumulate on the balance, so the money grows exponentially to pay off the bond’s principal upon redemption.

 

This means that these companies have sinking funds established exclusively to pay off the bonds’ debt.

 

You do have to consider their call provisions, which state when the issuer decides to redeem the security before the maturity date. In most cases, the issuer can only redeem the bond within a specified period of time. Many of these bonds may have a deferment period during which the issuer is not allowed to redeem this debt instrument within that time frame. 

 

If the issuer calls the bond away, you will lose out on more interest income, but you will receive the face value or a premium amount.

 

As long as you purchase the bond at a discount, you’ll profit from this trade, especially if you buy and hold highly rated bonds from reputable companies.

 

3. Municipal Bonds

 

Muni bonds are another alternative during the recession.

 

These bonds provide federally tax-free interest income. This is something to consider when the inflation rate rises because the inflation rate affects the after-tax return.

 

Munis can be attractive investments since you never pay federal taxes on the interest, and you can even be exempt from state and local taxes if you buy and hold the bonds of your state of residency.

 

The main concern is whether you can get a real return, depending on the coupon rate and the inflation rate.

 

During the early stages of a rising inflation rate, cities and states see tax revenue growth since they’re collecting more tax dollars as the prices of items go up.

 

This benefits them if inflation is short-lived. 

 

If the inflation lasts too long, both the city and the state may start experiencing a decline in tax revenue since consumer spending will decrease as the economy slows down.

 

As interest rates rise, muni bonds’ value will also decrease if their coupon rates are lower than the market rate. Any of those with interest rates higher than the benchmark will be more valuable. Hence, their price will be higher even if they are offered above their face value.

 

Of course, these bonds’ prices will rise if interest rates fall. The economy will also speed up with falling rates, which means the city and state will collect more and more tax dollars. If both entities are receiving lots of tax money, they’re likely to pay off debt.

 

Like corporate bonds, you may want to buy and hold muni bonds with a high investment grade of AAA or  AA since these highly rated issues are less likely to default.

 

Just like corporate bonds, muni bonds can also be callable.

 

4. Treasury STRIPS

 

What are these?

 

First, let’s discuss what STRIPS are. 

 

STRIPS is an acronym for Separate Trading for Registered Interest and Principal of Securities.

 

Now, we know what this stands for, but what does that all mean?

 

Well, these types of bonds are somewhat unique. With a typical bond, you receive periodic interest up to maturity along with the face value. All of this comes from each bond issue.

 

STRIPS is a form of coupon stripping for Treasury security. You’re not collecting the interest until maturity, but each periodic interest becomes a separate issue instead of a semiannual dollar amount. 

 

So, you would get multiple issues per STRIPS bond issue. There’ll be multiple issues for all semiannual interest periods and an issue for the principal, or face value.

 

If you buy a STRIPS bond with a 20 year maturity date, you would have 40 semiannual interest periods. That means you would own 40 total issues for the interest alone and one issue for the principal. In all, you’re getting 41 issues per STRIPS issue! Yes, that sounds crazy! 

 

If you buy Treasury STRIPS, each separate issue will have a $100 par value.

 

Let’s say you buy a STRIPS with a $100,000 face value and a 3% coupon rate. Now, you receive $3,000 each year. 

 

Instead of receiving interest in cash every 6 months, you’re receiving interest in the form of separate issues in addition to the issues of the principal. You would receive the cash at maturity or if you sell them in the secondary market. Yes, that’s correct. You can sell the interest and principal as you would with any bond issue. 

 

Treasury STRIPS are great investment vehicles to own during inflation if you hold them to maturity. They will not be as valuable in the secondary market since the Fed has likely raised the market rate during these periods to bring inflation down. 

 

However, these types of bonds tend to have lower yields, just like other Treasury Securities. This can be a concern if inflation continues to rise because the yields may not keep up with the inflation rate.

 

You still have to pay taxes on interest every year even though you do not collect the interest until redemption.

 

If you hold the Treasury STRIPS, you only pay federal tax on the interest. You never pay state and local taxes on Treasury Securities.

 

5. Bump-up CDs

 

Your traditional certificates of deposits (CDs) may not be good investment vehicles even during the period of rising interest rates because the high inflation rate will eat away at your returns.

 

So, we need to find cash alternatives that can protect your money during inflation.

 

This is where Bump-up CDs come in.

 

These CDs have a variable interest rate. 

 

These CDs’ interest rates only rise once if there’s a rise in the market rate, unlike a Floating Rate Note (FRN) whose rates change multiple times.

 

You’ll maintain that increased rate until maturity.

 

The good news is that the interest rate will never be below the original interest rate of this product.

 

If you buy a CD with a 5% rate, and the market rate drops to 4%, the CD will remain at 5%.

 

They are not the most ideal of all inflation-protected assets because of the one time rise in their interest rate. 

 

But if you buy at the right time when the market rate rises for the last time during a stretch, it can be a good place to park your cash since you’ll lock in a high rate.

 

If the market rate rises from 5% to 5.5% when you purchase a 5% bump-up CD, your CD’s rate will also rise to 5.5%. 

 

However, the interest rate will remain at 5.5% regardless of whether the market rate goes up or down again. This is a concern if there are no signs of disinflation or deflation, let alone falling market rates and a bull market.

 

However, another benefit to consider is that this product is federally insured under the Federal Deposit Insurance Corporation (FDIC) just like many types of CDs. Just keep in mind that the FDIC has a maximum limit of the account’s value (usually $250,000). 

 

If you deposited $249,000 and earned $3,000 worth of interest, you would have $252,000 in the account. As soon as your bank becomes insolvent and goes bankrupt, the FDIC would only pay back $250,000 instead of $252,000. 

 

So, you would lose out on the other $2,000. It’s better to deposit less than the maximum limit just in case that institution goes bankrupt, so you can get back the full amount of that account’s value.

 

As with any CD, you’ll pay a penalty if you withdraw money before maturity.

 

6. Variable-rate CDs

 

Variable-rate CDs are like CDs that resemble FRNs.

 

The interest rate is not fixed, and it will match the benchmark rates.

 

These financial products will still have a maturity date and a penalty for withdrawing the money early.

 

These CDs are wonderful tools to use when you want to park your cash somewhere while taking advantage of rising rates.

 

They are great to invest in when you anticipate the market rate going up before the CD matures.

 

The problem is that very few institutions offer these products. You would have to do thorough research to see which companies offer them if you are interested.

 

This investment can work against you if the inflation rate is higher than the interest rate offered. If anything, this security works best when you expect rising market rates and a drop in the inflation rate. This is the case with any investment you make. Therefore, you weigh the real return against the real loss.

 

There is a real return when the annual return is higher than the inflation rate, and vice versa with real loss. If the interest rate is 5% and inflation is at 4%, you have a 1% real return. In this case, it would be worth buying the variable-rate certificate.

 

But if the interest rate is 3%, and inflation is at 4%, that’s a -1% real loss. It would be a bad investment since you’re just losing out on parking your cash in this scenario.

 

Like the Bump-up CD, your variable-rate CD is also FDIC-insured. So you will not lose all of your money if the financial company becomes insolvent.

 

CDs are risk-averse which means they carry a smaller risk than other investments, but the returns are relatively low.

 

I know how anxious you can get during bad times in the economy. You should not worry too much, though! 

 

As we learned, there are ways to survive financially in a downturn. Just keep your head up and wisely spend and invest your money. 

 

You will be proud of yourself for taking the necessary steps to protect all of your money! 

If you want to know more ways to make money in a recession, click here.

 

Click here if you want to know the best ways to make money during inflation.

 

 

Inflation is one word that terrifies us. This fear stems from the fact that everything will be more expensive, and we will have to take more money out of our pockets as a result.

 

Inflation makes us spend more on the usual goods and services. After paying our normal expenses, we will have less money left over.

 

What is even more frightening is that if we try to save our money during this period, we’ll still be losing out. Inflation will erode any interest that we collect from our savings, and it will also eat away at the returns on any investments that we make.

 

This also forces us to tighten our budget and find ways to make more money.

 

Do you find yourself wondering if it is possible to make or save money during inflation?

 

The answer is yes! It’s absolutely possible to do both! It’s so necessary to make money more than ever and protect your wealth during these tough times!

 

Prices are soaring. This leaves us in distress. Hell, like everyone else, I’m even worrying a lot about how I need to adjust my finances. We all get this negative feeling when we watch the financial news and see that the Federal Board of Governors (the Fed) continue to raise the market rate.

 

It is not fun to worry about the economy, but we need to protect our money and assets now more than ever.

 

Inflation is a problem for everyone, whether you are a consumer or a business owner.

 

We track the inflation rate with the Consumer Price Index (CPI).

 

We know the Federal Reserve changes the interest rate to either speed up or slow down the economy. The problem is that we cannot always predict the exact direction the Fed will go.

 

A good target range for the inflation rate is between 2% and 3%. The annual average inflation rate is 3%, but the Federal Reserve likes to keep the inflation rate at 2%.

 

The 3% inflation rate per year slowly reduces the buying power of the dollar, causing more devaluation of the currency.

 

To have a stable economy, the Fed tries to keep a balance between inflation and deflation. We already know what inflation is, but what is deflation? Deflation occurs when prices drop to the point that the inflation rate is below 0%. For instance, when inflation falls from 4% to -0.1%.

Now if the rate simply went down from the previous period, such as from 5% to 4%, then that would be disinflation. Disinflation occurs when the inflation rate decreases but does not reach a
negative percentage like deflation.

 

The Fed has been able to keep inflation at bay for the time being, but it is uncertain what the future holds for all of us since there are talks about chronic hyperinflation.

 

When there’s inflation, businesses will slow down. Sure, that can have a negative impact on businesses, but the most important thing to worry about is how inflation will affect the economy, our money, and other assets.

 

Good news: You can greatly protect your finances from inflation, and I’m going to tell you how.

Stocks are not included because this asset class is most useful when there’s deflation.

 

The Great Depression will not save any of your money held in equities (stocks). Even if the economy recovers from that, it will take a long time to recoup your losses.

 

The following are good assets to hold when inflation is rising. Our focus is on the assets that will be valuable if inflation continues to rise.

 

 

 

 

1. Treasury Inflation Protected Securities (TIPS) Bonds

 

 

TIPS are inflation-indexed bonds. That is, their value follows the rate of inflation, which allows your investment to successfully compete with and even outpace inflation. They also have a fixed interest rate.

 

Unlike most bonds, the principal and coupon payments are variable. Instead of the face value, the market value reflects the coupon payments. The adjusted principal determines your interest.

 

The amount of the coupon payment depends on the inflation rate. Inflation also affects this bond’s market value.

 

For instance, let’s say inflation is at 5%. This will move your $1,000 TIPS holding up to $1,050. That 5% inflation rate increased the bond’s value by $50. The market price changes every 6 months, and so do your interest payments as you’re receiving interest twice a year.

 

If your TIPS coupon rate is 2.5%, rather than receiving $25 annually ($12.50 a period) from the $1,000 value, you would receive $26.25 per year ($13.13 semiannually) from the $1,050 price. Despite the fixed coupon rate, your interest payments vary. The inflation rate impacts the market value and periodic interest amount.

 

Suppose that inflation decreased by -2%, which would be deflation in this case. Assuming a 2.5% interest rate, your $1,000 TIPS would be worth $980, reducing the interest to $24.50 per year ($12.25 per period).

 

Prices rise with inflation and disinflation. Deflation lowers prices. TIPS is the perfect investment when you anticipate a rise in the inflation rate.

Disinflation, on the contrary, is when prices are increasing more slowly. People often confuse disinflation and deflation.

You receive the greater amount between market value and face value at maturity. If they are both equal ($1,000), you’ll get the face value. In the event that the bond’s market value is $1,050 at the maturity date, you will be paid out $1,050 instead of the $1,000 face value. 

 

The par value is either $100 (through Treasury Direct) or $1,000 (through a broker).

 

These debt instruments have 5, 10, and 30-year maturities.

 

2. TIPS mutual funds

 

So, you don’t have a lot of cash on hand to buy the TIPS issues. There is, however, another way to enter the TIPS market without putting up a large sum of money.

 

You can invest in mutual funds that hold TIPS in their portfolios. That’s right! There are funds out there that pool the money of many investors to buy these inflation-indexed securities.

 

Investors would benefit from not being tied to a maturity date. These funds hold various bonds with different maturities.

 

The fund’s manager also collects the interest from the securities and gives it to the shareholders in the form of dividends. In addition to the periodic dividend income, shareholders can receive profits when redeeming their shares.

 

Like any mutual fund, the investor has no say in how the fund uses his or her money or what securities he or she buys. Since the portfolio manager will buy the assets with the pooled money, the investor must trust the manager’s decisions.

 

The drawback to investing in a TIPS fund is that it’s very susceptible to interest rate risk. This fund’s Net Asset Value (NAV), or price per share, will fall as the market rate rises because these bonds have fixed interest rates. Interest income is contingent on inflation, and the coupon rate is usually low.

 

If inflation rises, the TIPS market value will rise, and vice versa.

 

You must pay taxes on dividends and capital gains, but if you hold TIPS fund shares in an Individual Retirement Account (IRA), you can defer the tax payments.

 

3. Series I Bonds

 

I Bonds are inflation-indexed like TIPS. These are great investments, especially during hyperinflation. 

 

You only need $25 or more to buy an issue. This security’s interest is compounded twice a year, every six months.

 

For instance, if you invest $25 in an I Bond with a 5% annual rate, you will get $1.27 in interest after a year. The total value then would be $26.27 ($25 + $1.27).

 

We compute this by $25 × [1+(0.05÷2)] × [1+(0.05÷2)] = $26.27. Since the interest accumulates twice a year, we multiply [1+(0.052)] twice. Then, we subtract $26.27 from $25 to get $1.27 in interest.

 

These bonds have a 30-year maturity date, but you can redeem them after a year.

 

If you cash them in within 5 years, you lose 3 months’ worth of interest. Of course, you keep all of the interest you have earned if you redeem the bond after 5 years or more.

 

You will only get 33 months of interest after holding the security for 36 months. If you liquidate the issue just after a year, you’ll collect only 9 months of interest instead of 12 months.

 

In our previous example, where you earned $1.27 on a $25 investment, you would have to hold the security for exactly 15 months (1 year and 3 months) to collect 12 months of interest. Remember that you lose 3 months of interest when you redeem the issue within 5 years.

 

If you redeemed the bond after a year, you would only get 9 months of interest. Interest would be $0.94 rather than $1.27. The early withdrawal here cost you $0.33 more in interest.

 

Like any investment, the more you spend, the more you make.

 

These bonds’ coupon rates rise with inflation and exceed it to provide real returns to investors.

 

When inflation was 8.2% in September 2022, the I Bond’s rate was 9.62%, giving investors a real return of 1.42% (9.62% minus 8.2%).

 

In May 2023, inflation fell to 4.05%. Thus, the I Bond’s coupon rate fell to 4.30%, yielding a 0.25% real return for the bondholder (4.30% minus 4.05%). 

 

The difference between the annual return and the inflation rate is the real rate of return. The annual return, in this instance, is the interest rate.

 

The interest rate changes every 6 months. You could argue that the interest rate on I Bonds is a good way to measure inflation.

 

The catch is that the interest rate is fixed. You will have to purchase a new issue if you want a different or even higher interest rate than the one you currently have. Keep in mind that higher inflation causes rising rates.

 

When inflation rises, you can buy more bonds at higher rates. This is also a good investment if you think inflation will go down, and you want to take advantage of the high return that comes with high inflation. That way, you can lock in a high interest rate before market rates drop.

 

Interest comes every six months. Your I Bond has a fixed rate, but this bond’s interest rate changes twice a year on the market. Since these bonds’ rates are fixed, you will have to buy more to get a higher rate.

 

The interest is exempt from state and local taxes! Unfortunately, you still must pay the federal taxes! Yet, you only pay the federal tax when you redeem the bond.

 

You can only buy these savings bonds through the Treasury Direct website: www.treasurydirect.gov

 

4. Floating Rate Notes (FRNs)

 

What are FRNs?

 

They are Treasury Securities with a variable interest rate that changes every six months. 

 

The Fed’s Funds Rate, our main market rate in the U.S., and the London Interbank Offered Rate (LIBOR), which financial institutions worldwide use to set loan interest rates, affect the FRN’s interest rate. 

 

FRNs are also known as “floaters” and “variable-rate notes.”

 

Inflation raises FRN coupon rates, as you probably expected. The Fed raises the benchmark rate to ensure a recession since inflation already slows down the economy.

 

FRNs help fight inflation and preserve your money’s spending power.

 

These notes have 2- to 5-year maturities and pay interest quarterly or semiannually, depending on the issuer.

 

Just like TIPS, you can find FRNs through Treasury Direct with a $100 face value or a $1,000 par value with a broker.

 

If you buy a $100 “floater” now at 4% (1% quarterly), you will receive $1 this period ($4 annually). You will get $1.25 ($5 annually) if that coupon rate jumps up to 5%.

 

5. Corporate Inflation-Linked Bonds

 

There are corporate bonds that adjust to inflation. Traditional corporate bonds have a fixed coupon rate which can work against an investor if the market rate rises.

 

Why buy the Corporate Inflation-Linked Bonds over the regular Corporate Fixed Securities?

 

Corporate inflation-linked bonds generate returns when market rates rise with inflation. 

 

These bonds have 5- to 10-year maturities and are subject to interest rate risk.

 

Due to default risk, corporate bonds yield more than Treasury bonds. Therefore, these issues will have higher coupon rates. This contrasts with Treasury securities, which are risk-free.

 

Traditional Corporate Bonds lose value during inflation due to their fixed interest rates.

 

So, we need to find a way to hedge against inflation. The solution for this would be to purchase the Corporate Inflation-Linked Bonds.

 

Similar to TIPS, the interest payments on these bonds depend on the rate of inflation and change over time.

 

The difference is that Corporate Inflation-Linked Bonds pay interest monthly. The interest rate and coupon payments adjust monthly with inflation and the CPI. As a result, you will probably collect different amounts each month.

 

Interest from these securities is subject to federal, state, and local taxes.

 

Though rare, these issues occur mostly in banks and other financial institutions. Only a small number of them are available.

 

If you’re able to get this security, you can also sell it on the secondary market.

 

6. Gold

 

Inflation devalues the dollar. When devaluation happens, people lose confidence in the dollar.

 

Thus, they must turn to another currency that will rise in value during the period of inflated prices.

 

And gold is one of the trusted currencies that appreciates in value during inflation. Gold’s price rose over 105% from 1929 to 1939 during the Great Depression. 

 

Gold lost value before the Great Depression because people preferred the dollar. There were more dollars than gold. In 1914, the year the Fed introduced the dollar, gold’s value began to decline.

 

The Gold Reserve Act of 1934 banned U.S. citizens from owning gold until almost 1970. This is to reserve gold since there was a limited supply for the public.

 

In the 1970s recession, gold’s price surged to just over 807%.

 

During the 1970s, the dollar lost its gold backing. Due to the growing use of U.S. Dollars, gold temporarily lost value. Gold prices rose exponentially as inflation, recession, and foreign trade deficits hit the U.S. around that period.  

 

The value of this precious metal increased by more than 75% a few years after the 2008 financial crisis.

 

And during the COVID-19 recession, it went up by around 22%.

 

People expect the dollar to lose value over time.

 

Gold’s scarcity and stability make it valuable. 

 

There are various ways to invest in gold:

• Gold Bullion and Coins
• Gold Stocks 
• Gold ETFs
• Gold Futures
• Options Contracts for Gold Investment Products

 

7. Other commodities

 

What are commodities?

 

They are items of agriculture and raw materials that we buy and sell. These include metals (gold, silver, copper, etc.), energy (gas, oil), crops (cotton, corn, soybeans, wheat, etc.), livestock (pork, beef, milk, etc.), and other foods (cocoa, coffee).

 

Commodities are goods we consume daily, let alone need.

 

Do commodities protect against inflation?

 

Absolutely! Inflation means that the prices of goods are going up. Commodities are goods, so inflation will raise their value.

 

We previously discussed gold’s inflation-fighting capabilities. Gold is a commodity, and when prices go up, other commodities will likely be worth more. 

 

You can make commodity investments through Exchange-Traded Funds (ETFs) or futures contracts. Always do your homework before investing in a commodity. 

 

8. Real Estate

 

Real Estate is the perfect investment to fight inflation.

 

Why is that?

 

For starters, everybody needs a place to live. So, the demand to find and buy a place will never go away.

 

Also, housing prices rise when there is inflation. 

 

This type of asset will always be valuable, and as inflation gets worse, home prices will continue to rise.

 

If your property has appreciated significantly since you bought it, you may want to sell it.

 

Now more than ever, you need to find ways to make additional money because everything is getting very costly. So, why not invest in an asset that will be more valuable when prices go up?

 

The best time to sell the property is right before the Feds begin raising the market rate. This will be the period when the inflation rate is rising, and the Fed has yet to raise the market rate even though there is talk about it in the financial news.

 

If you own rental property, you can raise the rent. Remember, with inflation, everything goes up including your income and expenses.

 

The CPI and inflation rate can give you an idea of real estate prices if you study the economic measures.

 

Let’s figure the price of a small home if the CPI was 100 in 1983, 350.489 in 2022, and 378.622 in 2023.

 

A small home valued at $60,746.60 in 1983 was worth $213,153.74 in May 2022 and $230,000.00 in May 2023. Inflation was just over 8% from May 2022 to May 2023.

 

But do you see how these housing prices have ballooned?

 

What makes real estate unique is that it is both a product of consumption and an investment tool, unlike other assets. Real estate prices rise during inflation along with consumer goods.

 

Though real estate is not a commodity since it is a shelter, it does behave like one.

 

9. Real Estate Investment Trusts (REITs)

 

There is a way to gain access to the real estate market without spending huge chunks of money.

 

You can invest in REITs. These are mutual funds that invest in the real estate market. 

 

Essentially, a REIT is a company that pools multiple investors’ money and buys properties or invests in mortgages while distributing the returns to the fund’s shareholders. 

 

These funds trade publicly like ETFs. They have grown in popularity, especially among small investors who want to enter the real estate market.

 

There are 3 main types of REITs that investors can choose from. 

 

First, there are equity REITs in which the company uses the pooled funds to buy and own property. Instead of keeping all of the monthly rent, the company distributes the majority of rental income to its fund’s shareholders.

 

Second, there are mortgage REITs, in which the company uses the money from investors to give loans to building developers and mortgage lenders. The company collects interest from loans and distributes it monthly to shareholders.

 

Finally, there are the hybrid REITs which are a mix of equity and mortgage REITs in one fund. The company will simultaneously invest in loans and properties in this case. As a result, shareholders will collect monthly income that will come from rent and interest.

 

REITs generate high returns and provide consistent income. 

 

Sadly, they never pay qualified dividends. So, you won’t be able to enjoy tax advantages from this type of income. However, these funds trade like ETFs on a public platform, making them highly liquid.

 

10. Cryptocurrency

 

All of us have heard about the crypto markets.

 

One of the main issues with cryptocurrency is the level of uncertainty. Because the price changes every minute, we do not know how many dollars make one Bitcoin.

 

Many people do not think these coins will be worth much in the future, but others think their value will go up by a lot because of hyperinflation.

 

The rising inflation rate boosted the crypto market. When there were large bank runs during the banking collapse in early 2023, this sparked the crypto market.

 

To fight inflation, crypto was created as a decentralized currency system.

 

However, many people believe a digital fiat currency will be the next best asset created.

 

Some people say the dollar will not be worth much in many years. So, many investors are buying these digital coins along with gold and silver as a form of financial protection.

 

For now, crypto is deemed a very risky asset. If you choose to invest in these coins, I suggest buying them in small batches.

 

It’s best to employ dollar cost averaging when you invest in this asset class. This is when you add small amounts of money on a regular basis to any asset class, such as your 401(k), stocks, etc.

 

Since this is a risky asset class, only invest money you are willing to lose. (Of course, you should always invest with money you do not need because you are taking a risk.)

 

In my opinion, the best way to invest in crypto is to buy Bitcoin and Ethereum when inflation and market rates rise during an economic recession. 

 

If you are unsure or expect the market to rise, buy stablecoins Gemini Dollar and Tether Dollar.

 

You can also gain interest while holding any of the crypto coins. This is when you stake the coins, or request to receive interest while holding them for a specified period of time.

 

It’s just important to choose a good crypto platform. I believe that Coinbase is a great platform because it offers various coins there. You can also stake the coins that you’re holding in your portfolio.

 

You can also use well-known platforms such as PayPal and Fidelity even though there are limited options of coins to choose from. These platforms also do not let you stake these coins to get rewards.

 

When you own these digital tokens, make sure you use the crypto wallets or ledgers so the coins are officially yours.

 

In conclusion, one thing you must consider when you invest in these assets is that they’re not as valuable when the inflation and market rates go down. That is why it is crucial to research the economy before making a decision.

 

You can buy the different Treasury securities on Treasury Direct or through a broker, but you can only buy the Series I Bonds on Treasury Direct.

 

When you buy and hold Treasury Securities, you have to trust that Uncle Sam will not stop paying its debts, or else you may not get your money back. I say this due to discussions over raising the debt ceiling.

 

At the end of the day, you want to protect your money’s purchasing power from inflation. Some of the best ways to do this are to invest in the asset classes mentioned.

 

If market rates fall, fixed-rate securities are the better alternative.

 

Inflation-driven investments were the main focus of this article.

 

If you want to know what investments to make during a recession but expect a bull market, read this article here. 

(If you click on these links, I won’t make any money. These links are for your own benefit.)

People always say that you should build up your credit. So, what does this all mean?

 

When you apply for credit, you want to borrow money so you can buy something.

 

But you have to pay back that money, plus interest.

 

We borrow money when we can’t or don’t want to pay the full price for something we need or want right away.

 

We also borrow money to spend it on things that can help us make more money such as a home or into stocks.

 

Along with debt comes the credit score, which is a number that indicates how reliable we are as a borrower. In other words, how likely we are to pay back what we owe.

 

I’ve been in debt before, so I know it’s not fun. Or, if anything, going into debt is a risk, even if it’s for a good reason like going to school, buying a car, or buying a house.  I also had to worry about my credit score when I was looking for loans.

 

I learned that I could get better deals when my credit score was high than when it was low.

 

I can remember when I took out my first loan. At that time, my credit score was not good.

 

It was only “fair.” This meant my rating was between bad and good.

 

The FICO score is the credit score that most people know about.

 

Why does the FICO score matter so much?

 

It shows lenders how well you can manage your money, especially if you already have debt.

 

FICO is an acronym for the “Fair Isaac Company,” which is based in California. This company uses its scoring system to figure out how much of a risk a consumer is.

 

How does FICO figure out if someone is creditworthy?

 

It looks at your credit reports from Equifax, TransUnion, and Experian. These 3 names are the most well-known credit bureaus.

 

And, using 3-digit numbers, FICO also keeps track of each consumer’s credit grade based on his or her debt. These numbers range from 300 to 850.

 

What do these numbers mean, though?

 

You guessed it. The worst score you can get is 300, and the best score is 850.

 

It’s good to have your score above 700, let alone above 720 to be creditworthy. Of course, it’s even better to bump your score up to 750 and above which is an excellent range.

 

It’ll save you lots of money down the road. I’m talking about hundreds to thousands of dollars.

 

If your FICO score is high, especially if it’s above 720, you’ll pay less interest on any debt you have. In other words, if your score is low, you’ll have to spend more money, but if your score is high, you’ll spend less money.

 

Let’s look at two shoppers. Person A has a 760 FICO score and qualifies for a 30-year, fixed-rate home loan with 5% interest. Then there’s person B, who has a score of 659 and gets the same loan for 8%. Each of them gets a $150,000 loan to buy a home.

 

If we do the math, person A would pay less each month (around $805.23), while person B would pay more (around $1,100.65). That is a monthly difference of $295.42! Person A would save $106,351.20 more than Person B over the life of the loan because Person A’s credit score is higher!!

 

I wasn’t happy with my credit score at one point. So, I wanted to raise my score as quickly as possible, and I did.

I was most shocked that I did not need to be good with money or have a lot of cash to boost my score!

How did I do it?

 

I am going to tell you what you need to do to raise your FICO score.

 

1. Pay all of your bills on time, especially all of your debt

 

We all know that we must pay our bills on time. When we pay our monthly loan and credit card bills, these payments affect our credit score the most. 

 

Avoid any late payments so you’ll be on the right track to improving your credit. 

 

Paying off debt on time can even increase your credit score by 40+ points.

 

2. Paying your credit card bills in full every month

 

You want to pay off the entire credit card balance every single month.

 

Lenders want to see that your credit card debt is low when you ask for a loan or more credit.

 

This shows the creditor that you have good money habits and are financially responsible. You also show that you can pay off any debt that comes your way.

 

Lenders would rather see you pay off the whole amount than make small payments.

 

When you only pay the minimum amount, your credit card debt will continue to grow. Since you’re not paying off your balances, the debt keeps getting bigger. Also, interest will keep adding to any amounts that aren’t paid off.

 

When cardholders let their debt grow for a long time, it will be hard for them to pay it off.

 

Consumers with higher debt balances are high-risk.

 

3. Get a high credit limit or take out big loans

 

Even though a good credit limit is important, you don’t want to have too many credit cards.

 

Lenders look negatively on people with a lot of credit card accounts on their report.

 

If you have a lot of credit cards, you might be less likely to pay back what you owe.

 

The average American has 3 to 4 credit cards.

 

This isn’t so bad if you can pay off your balances in full every month to keep your debt from getting worse.

 

If you decide to get more than one card, you should get at least three.

 

You can even ask for a raise in your credit limit after paying off your debts for a while. But you should wait until you get that pay raise first from your employer.

 

Getting bigger loans like student loans and mortgages will look good on your credit report, especially if you’ve been making payments on time for a while.

 

4. Keep your credit utilization rate low

 

What does that mean?

 

Let’s break this down.

 

First of all, what’s credit utilization?

 

It’s pretty much like what it says.

 

It’s how much you use your credit card per period.

 

Lenders and credit card companies like to know how much you’ve charged on the card. They use a portion of the credit limit on that plastic card to figure this out.

 

As a general rule, your usage rate should be less than 30%.

 

This is to show that you’re not a high-risk customer.

 

If you go over 30%, lenders will see you as a high-risk borrower.

 

If your card’s cap is $30,000, you shouldn’t spend more than $9,000 each month (30% of $30,000).

 

People in both the middle class and the upper class who make a decent living tend to have bigger credit card balances.

 

The good thing is that the majority of Americans have good credit scores.

 

Should it worry you if you have a lot of debt but also have good credit?

 

Well, not so much if you make a good living and have a lot of cash on hand.

 

Also, you’ll remain in good financial shape if you’re good with your money.

 

But if your income or net worth isn’t very high, you should be worried. If you make less money, you might not be able to pay back the amount of debt or credit you took out.

 

Even though it’s smart to stay within the credit limit, it’s smarter to use less than 30% of it.

 

5. Having credit and debt history

 

Let’s say the lender is looking at 2 different loan applicants.

 

Applicant #1 has no type of debt, not even a credit card but makes decent income around $70,000 to $80,000 a year. Also, this same person has been paying all the monthly bills on time.

 

Then, there’s Applicant #2 who makes the same amount as Applicant #1. Yet Applicant #2 has $30,000 of student loan, auto loan, and credit card debt. Person #2 also has been paying the credit card balance in full every month and along with the other loans.

 

Who will the lender find more creditworthy?

 

If you said person #2, you’re correct.

 

Lenders have more information on how person #2 manages his or her money, but they don’t know much about person #1.

 

6. Increasing your average age of credit

 

The average length of credit is also important.

 

You’re probably wondering what that is.

 

You basically take the total number of years you’ve held the credit cards and divide them by the number of cards you have.

 

So, let’s say you have 3 credit cards, but you got them all in the same month and used each one for 6 years. In this case, the length of your credit would be 6 years. 

 

You calculate the years held by each card (6 years) and add them together (which equals 18 total). 

 

Then, you divide 18 by 3 (or by the 3 cards), which gives you 6. In this instance, the average length of credit history is 6 years.

 

But what would happen if you got the same 3 credit cards at different times?

 

If you’ve had your 1st card for 6 years, the 2nd one for 4 years, and the 3rd for 2 years, your credit length would be 4 years. You would add the years together (6, 4, and 2) which would give you a total of 12 and divide 12 by 3 (since you had 3 cards) to get 4 years.

 

So, the average age of your credit would be lower.

 

But here’s the kicker. After you got your third card, your FICO score would go down because the average length of time you’ve had credit would also go down. If you hadn’t gotten the third card, your average would have been 5 years (6 years + 4 years = 10 divided by 2 cards = 5 years).

 

You don’t have to get credit all at once, but it’s best to do it within a short period of time.

 

Your credit background and score will be better if your credit age is higher.

 

7. Taking on secured debt more than unsecured debt

 

It also matters what type of debt you have.

 

Let me explain more about this. 

 

There are two kinds of debt in the lending world.

 

The first type is secured debt, in which the borrower has to give up an asset as collateral or security if he or she can’t pay back the loan. The security can be a bank account, stocks, a house, a car, or anything else of value.

 

The other type is unsecured debt which means there is no collateral included. You could say this debt is the riskiest since there’s no security.

 

It probably doesn’t come as a surprise that lenders prefer the secured loans or credit over the unsecured ones because the creditors can take any of the borrower’s assets if the borrower can’t pay back his or her debts.

 

Mortgages are a good example of a secured loan, since the home is usually the security. If the homeowner doesn’t pay back the loan, the lender can take back the house, sell it, and use the money from the sale to pay off the loan.

 

These home loans are good debt because a person borrows the money to invest in a property.

 

On the other hand, credit cards are usually unsecured debt because many of them don’t come with security. They are also bad debt because the person borrowing the money often uses it to buy things he or she wants or needs.

 

This doesn’t mean we can’t use credit cards to our advantage. We need to wisely use them to benefit from them. If you plan to get credit cards, it’ll be better to get the secured ones instead of the unsecured ones.

 

Remember, lenders don’t have a good outlook on unsecured debt.

 

These are the necessary steps to build up your credit.

 

The credit score is so important because it gives you borrowing opportunities such as:

 

• Buying a home

 

• Getting that new BMW that you have wanted so bad

 

• Funding that business you have been waiting to start up

 

That’s why I can’t say enough about how important it is to always improve your credit score.

 

You can request your free credit report once a year at www.annualcreditreport.com  

 

You can get your credit score from the 3 main bureaus:

 

Equifax  www.equifax.com 

TransUnion  www.transunion.com  

Experian  www.experian.com  

If you want to know what could be hurting your credit score, click here.

(If you click on these links, I won’t make any money. These links are for your own benefit.)