Question about interest rates on money markets or CD's.....?

Question

I dont really understand how any money market or CD's can be considered a "safe investment" when for example, a Money Market which has a apy of 4.5% has to FIRST be adjusted to the average inflation rate of 3% which leaves you 1.5% that you are REALLY getting , then after that you get TAXED which must be at least another 1% of your investment, that leaves you with 0.5% which is HORRIBLE. Can anyone explain why you would not AT LEAST invest in GOLD (inflation protected , possibly tax sheltered) or I-Bonds (inflation protected, state tax sheltered definetely)...Why would any invest in anything else but these two methods? It seems stupid to invest in anything else

If you know any other "safe investments" that have a decent return after INFLATION and TAXES have been taken out please let know, or If I have made any mistakes in my rant.

Correction...I-Bonds ( federal exempt, not state exempt)

Answer 1

In order for it to be an investment-- there must be risk and reward. CD and money markets are NOT investments since the Principal amount is guaranteed by the bank or SIPC. The ONLY investment that should be considered "safe" are U.S. Government securities. The U.S. Government has NEVER DEFAULTED on any ISSUE. Now the rate of return is not that great but the returns are exempt from the IRS. The returns can be taxed by the state.
I am a Former Regestered Principal with the NASD & NYSE Firm

Answer 2

Government bonds have horrible returns and inflation is often difficult to measure and is averaged at 2-3% a year, it may be higher or lower. No investment is entirely inflation protected, and I can gaurantee that the interest earned annually on a money market is far better than any government bond. For a 100 EE bond, for example, adjusted for inflation, you only make about five dollar on it and it takes 20 years to mature. Investing in gold also flunctuates, while it is a precious metal it's like anything else. Your safest investment will always be bank accounts because stocks are risky with market flunctuations. You must also take into account the time value of money (present value v. future value). If you analyze these investments in terms of finance, completely adjusted for taxes/interest/inflation, CD's and Money Market accounts are the safest investment. Also, SAFE investment does not = high paying investment. You trade the two, stocks are very risky but play the cards right and you *could* end up way ahead in returns. MM/CD's won't earn the high returns but hey, you're not going to lose on that, either.

Answer 3

Your math is correct on cds except normally negative after inflation & people have to get out of the mind set that thier money in the bank is safely growing when it is doing no such thing purchase-power wise. The idea thta only gold & TIPs bonds is the answer is not correct though gold in a great cycle (finally) now due to India & China. Reits covering health care/senior properties (SNH) & apts along with globally diversified (though I like EWA - Australia) stock portfolios beat inflation over time. IAU best physical gold play. Need that liquidity.

Answer 4

If you had invested in gold last summer and sold it now you would have LOST money. your math is incorrect. if you get 4.5% and you are in the 25% fed tax bracket, and you pay another 8% state tax, total 33%, then you will be earning 3% after tax. in your example that is equal to inflation, so you broke even.

Answer 5

money markets and CDs can't LOSE money. that's why they are called "safe". gold, i-bonds, etc. can all fluctuate and you can lose part or all of your principal.