How Inflation Works

Inflation is something that we seem to hear about everyday yet most of us know little about it. This is unfortunate and dangerous because inflation is one of the most powerful financial forces out there. It has brought down governments and destroyed entire economies in the past.

If that wasn’t bad enough inflation can also destroy your investments and undermine your financial position. It is also one of the most dangerous threats to retirees and their investments. Retirees are often very vulnerable to it because they often live on fixed incomes.

What Causes Inflation

The most common cause of inflation is simply an increase in the money supply. If there is more money in circulation or use the value of currencies falls. Historically this was why people favored gold or silver coins over paper money.

Governments or counterfeiters could simply print more paper money but precious metals were rare and hard to come by. There have also been cases in history when governments and others deliberately sabotaged currencies by printing and distributing large amounts of counterfeit money.

An even more damaging cause of inflation is lack of faith in the government. This is why hyperinflation (astronomically high inflation) often occurs in nations that lose wars or undergo revolutions. It is also why inflation is so common in third world nations and Communist countries where people believe the government is worthless so they think the money is worthless. The less faith people have in the government, the less faith they will have in its’ money.

Another cause can be currency trading. Speculators can cause inflation by refusing to buy a nation’s currency or by dumping large amounts of it on the market at once. Some observers wrongly blamed currency trader George Soros for the collapse of some Asian currencies in the 1990s. In today’s world the value of currency as determined by trading in London can cause inflation. If large amounts of currency would suddenly leave a country through electronic transfers, inflation could result.

Some economists also believe that government debt can cause inflation. Nations that take on a lot of debt such as Argentina have undergone hyperinflation. The debt reduces the country’s buying power and the value of its money.

Inflation’s Effect on Money

The effect of inflation on money is easy to see it reduces the buying power. If the inflation rate is 10%, then a dollar will actually be worth 90 cents. Under those circumstances $100 in a bank account would be worth $90 and so on. In inflationary periods prices go up because businesses earn less profit from what they sell.

One reason why inflation is destructive to retired people is that it can wipe out investment gains. If the rate of inflation exceeds the interest rate on an investment such as a fixed annuity the funds in that vehicle will lose money. If the rate of inflation is 9% and your annuity paid 4% you would lose 5% of your money.

Protecting Yourself from Inflation

The way to protect yourself from inflation is to put a large percentage of your funds in investments that increase in value faster than the rate of inflation.

The historic rate of inflation in the USA is around 4% but the stock market usually grows in value by 11% a year. Therefore indexed investments (vehicles in which the return is pegged to the S&P 500 or another list of stocks) will usually beat inflation. Putting part of your funds in an indexed fund or an indexed annuity can protect them from inflation.

Something you will not have to worry about is inflation destroying Social Security. Social Security has an automatic cost of living increase. That means Social Security payments are raised by a rate that matches the rate of inflation every year. Inflation is something you should be aware of but it is not something you should lose sleep over. There are ways to protect your money and your investments from it.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

Tagged , , , , ,

Are Stocks a Good Investment

The truth is that stocks can be an excellent investment under the right circumstances. Unfortunately stocks can be a very bad investment for many people. It is also very easy to invest in stocks the wrong way so many people will inadvertently turn a good investment into a bad one.

A Long Term Investment

The first and most important thing to remember about the stock market is that it was intended as a long term investment. The reason most people lose money on stocks is that they fail to own them for a long enough period of time. Nobody has made more money out of stocks than Warren Buffett, Mr. Buffett made his billions by holding equities for a long time not by trading them.

Only put money in stocks or stock-based investments such as ETFs, Mutual Funds or indexed annuities if you can live without it. Funds that you might need in the near future should never be kept in a stock-based investment. The truth is that the average person simply cannot make money by holding stocks on a short term basis.

Stocks are a great long term investment because they usually grow in value each year. On average the S&P 500 increases in value by around 11% a year which is a pretty good return. That means $1,000 invested in an S&P 500 fund for ten years would grow to $11,100. It would only grow to that level if the funds were left in there.

Part of the reason why stocks are a good long-term investment is that they usually beat inflation. The rate of inflation is usually around 4% which exceeds the rate of return on most fixed interest investments. A person invested in stocks will still get a 7% a year rate of return on his her investment in spite of inflation.

A Lousy Short Term Investment

Stocks are very lousy short term investment because the stock market can be extremely volatile. That means it can suddenly greatly increase in value or fall in value. In 2008 the S&P 500 lost 37.22% of its value but the next year in 2009 it increased in value by 27.11% and gained another 14.32% in 2010.

That means a person who held onto his shares would have regained money lost in the market meltdown of 2008. It also means that stocks are very poor place to put funds you only want to hold onto for a short time.

Another reason why stocks are a poor short-term investment is that you will have to pay a brokerage fee every time you buy or sell a share. This is the real reason why brokers encourage trading they make money every time you move a stock. In many cases the cost of brokers’ fees will exceed whatever you make on a stock.

Speculation vs. Investment

One reason why many people think that stocks are a lousy investment is that they are confusing speculation with investment. When you speculate you purchase something because you think it will increase steeply in value in the near future so you can sell it for a profit. When you invest you buy something that will retain its value or increase in value over the long term.

Charley thinks that he can make a lot of money by buying a stock then using a computer program to predict when the stock will hit its highest price so he can sell at a huge profit. Charley may tell himself that he is investing but he is really speculating. Gordon buys an S&P 500 fund because he wants to protect his retirement nest egg from inflation. Gordon plans to keep the fund for many years, Gordon is investing.

Stocks can be an excellent investment if they are used properly. Stocks are terrible investment when people use the stock market for speculation.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.

Tagged , , , , ,

Are Annuities a Good Investment

Annuities are just like any other investment: they are a good deal for certain people in certain situations. An annuity is not a good investment for everybody but it can be a good investment for many people.

The main factors in determining whether an annuity is a good investment for you are: are your age, your income level, the amount of income that you can afford to invest, the type of annuity and your retirement needs. Of these factors age is probably the most important factor.

Age and Taxes on Annuities

The main reason why annuities are a bad investment for the young is the present US tax or Internal Revenue Code. This law defines an annuity as a retirement investment. That means it is tax-deferred so no federal taxes are due on funds in one until they are taken out.

The problem with this is that the code imposes a 10% tax penalty on withdrawals from annuities for those who are under 59½ years in age. That means if Cookie was 45 and she withdrew $40,000 from her annuity she would have to pay $4,000 in extra taxes. She would also have to her regular income tax on that $40,000 in addition to the $4,000 penalty.

That means for the average person who is under 45 or 50 an annuity is not a good investment. Only persons with a lot of extra income would benefit from them. An annuity might be a great deal for a person with a high income who wants to reduce his tax bill and ensure a retirement income.

A Good Retirement Investment

The right type of annuity can be a great retirement investment because of the nature of these vehicles. An annuity is a contract between an individual and an insurance company. This contract obligates the insurer to make regular payments to a beneficiary as long as the contract is in force.

If Bert bought a $200,000 life annuity when he was 60 he could receive a monthly payment from the insurance company for the rest of his life even if he lived to be 110 years old. This makes such contracts ideal for people who have a lot of cash right before they retire.

Such contracts are a really good deal for persons with no retirement plan or those who are uncertain about their retirement. Bertha has worked for the same company for many years and she has a good pension. Yet she is skeptical of the soundness of the pension plan. Bertha could purchase an annuity to supplement her pension income.

Deferred vs. Immediate Annuities

Different types of annuity can be good investments for different people. Charley is still working and he has a good income but he has not saved much for retirement. To make matters worse the amount Charley can put in his IRA is limited. Charley could use a deferred annuity to save an unlimited amount of tax deferred money for his golden years. For a person who can invest a regular amount of money each month a deferred annuity can be a good deal.

Glen is in business for himself and he needs to have a lot of extra cash available to cover operating costs. Glen would be best advised to wait until he is ready to retire and purchase an immediate annuity at that time. This kind of plan starts paying out as soon as you buy it so it is ideal for a person that is about to retire.

Yes, annuities can be a very good investment under the right circumstances. Therefore it is always a good idea to conduct a lot of research before buying one.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

Tagged , , , , ,

How Does Bankruptcy Work

Bankruptcy is a legal process in which an individual or business asks a court to discharge debts. Contrary to popular belief it is not a way to get rid of all debts or a solution for financial problems. Instead bankruptcy is designed as a last resort for those in financial trouble not a way to get out of paying one’s bills.

Bankruptcy cases can only be decided in bankruptcy courts. Under US law state courts have no jurisdiction over bankruptcy.

The Basic Bankruptcy Process

When a person declares bankruptcy he is turning administration of his financial affairs over to a special federal court called a bankruptcy court. If you declare bankruptcy a judge will have control over your finances. The judge will either reorganize your assets or liquidate them to satisfy your creditors. The judge may also turn your property or business over to a bankruptcy trustee for administration.

The judge will be able to seize the funds in your bank accounts and use them to pay any unpaid bills you have. If a business is involved the judge can also seize its’ assets and sell them to pay creditors. The judge can also decide which creditors get paid and which will not. He can also create a schedule for paying the debts.

The judge has the right to discharge certain kinds of debts that you cannot pay in a bankruptcy. This includes unsecured debt including credit card balances and most loans. The judge also has the right to eliminate certain kinds of liens on property.

Types of Bankruptcy

The first step in this process is to determine what type or Chapter of bankruptcy to apply for. The three most common types for average people are Chapter 7, Chapter 11 and Chapter 13.

Chapter 7 bankruptcy or the liquidation of debts is restricted to those without the money to pay their bills. If George was unemployed and had a large amount of credit card debt he could petition a court for Chapter 7. Under present law George would have to submit to a means test to prove to the court that he lacks the funds or potential income to pay his debts.

Chapter 11 or reorganization is designed for businesses. If the Ace Corporation was insolvent and unable to pay its bills it could file for chapter 11. This would protect Ace’s assets from creditors and allow for a reorganization of the company. If you have a corporation or LLC you will have to file for Chapter 11.

Chapter 13 is designed for persons with a regular source of income that cannot pay their bills. If Shirley had credit card debts that exceeded her salary she could apply for Chapter 13. Shirley could use Chapter 13 to protect her house from liens but she would be required to make payments on her debts. The court might order her to follow a payment plan.

People in some lines of work such as farmers or fishermen can also take advantage of a slightly different process called Chapter 12. Chapter 12 is not available to most Americans.

Something to be aware of is that bankruptcy proceedings are somewhat different in North Carolina and Alabama. In those states bankruptcies are handled by a separate class of professionals called bankruptcy administrators.

How to Apply for Bankruptcy

The best advice for a person that is thinking about bankruptcy is to talk to an experienced attorney before moving forward. The process is very complex and the laws governing it are constantly changing. That means you should find out exactly what your rights and responsibilities are before you begin the process.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.

Tagged , , , , ,