I have developed a series of posts on passive income. The goal of this series is to present a variety of investment strategies you can use to strategically build up your investment portfolios with the intent of producing an increasing amount of passive income. Alright, here we go.

I Bonds

Buying bonds allows money to be invested in a safe cash market; the return is slow but certain. There is of course a tradeoff to working with bonds. Cash committed to bond will bring the expected yield only if the bond is kept until the time of its maturity. Keeping the bond for the extended period, up to 30 years, allows the bond to return an additional percentage of its original value. Bonds do not offer the high returns you can find with stocks, but what is offered is a security that the money will be repaid to the bond buyer.

The goal of using the bonds is to preserve, over time, the purchasing power of the original investment and protect it from inflation and the decay that might be caused by market volatility.

There are various groups offering bonds for sale. U.S. Treasury is one of those bodies and they offer U.S. savings bonds. We will focus on one type of bonds, I Bonds. These bonds return two types of yields: a fixed rate and a variable rate based on the inflation rate. Adding these two provides for an amount of cash the bond generates. However the true value of the bond would have to be adjusted based on the tax bracket you belong to: in short the higher your tax bracket the less cash you see at the end.

Here are two examples. Let’s assume the bonds initial value is $1000 and it was held for a period of five years from its purchase. Based on the 1.5% fixed rate and 2% inflation rate for a person in the 15% tax bracket its final value would be $1050. Now, the person in a 33% tax bracket would see an addition of $20 to the original value of purchase.

Example 1

15% bracket

Initial investment $1000

Gain $1050

Example 2

33% bracket

Initial investment $1000

Gain $1020

On the surface it appears that the gain is minimal, however the numbers are actually based on the cash in hand after counting what you pay in taxes. Your tax bracket pays a large part in the profit you will see when you cash in the bond. The idea was, again, to preserve the purchasing power of the initial investment. If you would assume 2% inflation without that the true value of $1000 that is not invested (or protected in bonds) would decay in five years to $902!

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