With inflation hitting record levels everyone is talking about Series I Savings Bonds! Why? Because the current interest rate on an I bond is 9.62%!! So, you’re likely asking yourself, “Should I buy?” As you can imagine…it depends.
First, do you have funds you’re comfortable locking up for up to one year? If so, read on. Let me break down the I Bond so you can decide if this is a right investment for you.
I Bonds are US government savings bonds that you can purchase on TreasuryDirect.com. They are a low-risk investment 100% backed by the US government. So, as long as the US government stays around, the I Bond doesn’t lose value. This is money that doesn’t lose its value and earns a 9.62% interest rate - unheard of right now - and why everyone is talking about them.
The interest rate of an I Bond is made up of 2 parts: the fixed rate & inflation rate.
The fixed rate stays the same for the life of the bond. Currently, when you buy, it’s 0% (so we don’t need to discuss this).
The inflation rate is based on the changes in the Consumer Price Index for All Urban Consumers (CPI-U) - think rent, gas and food.
Note: The inflation rate gets reset every 6 months (May & November). This is important to note because the 9.62% doesn’t last forever and will reset after 6 months based on the changes in CPI-U. If inflation continues to rise, then the interest rate will remain steady. However, when inflation is extremely low, the interest rate will decline.
There is a $10,000 purchase limit per calendar year per person. There are ways to buy more though :)
Married couples can purchase up to $20,000 ($10,000 each)
Businesses can purchase another $10,000 - you set-up a separate business account on Treasury Direct
You can purchase $10,000 for your children - you will need to understand gift implications, especially if you’re contributing to their 529 or investment account
You can purchase $10,000 for a living trust - you set-up a separate trust account on Treasury Direct
Other important things to note:
You can’t cash them for 1 year.
If you cash them before 5 years, you lose the last 3 months worth of interest as the “penalty.” That said, since the interest is higher than any savings account right now, you will most likely still be ahead in 1 year.
In order to take advantage of the 9.62% rate, you need to purchase by October 2022.
Here is a great example from Treasury Direct on how purchasing an I Bond works:
I Bonds can be purchased through October 2022 at the current rate. That rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022. Interest is compounded semi-annually.
Note: Since the inflation rate is reset every 6 months, the I Bond will most likely not earn 9.62% in the next 6 months. The inflation rate (interest rate you earn on the I Bond) will reset to whatever the latest change in inflation is, and with the fed raising rates, it’s likely it will be lower.
Townsend Tip: If you have liquidity outside of your emergency reserves and are okay with locking up funds for 1 year (i.e. you are saving for a house, but won’t be buying it for at least another year OR you have a non-retirement investment account that you could tap into as reserves and has plenty) then yes, I say invest your cash in I Bonds as no savings account I know of is paying 9.62%! It’s a great way to keep pace with inflation.
If you would love to have someone on your team to walk you through topics like these and how they impact your unique situation, schedule a free intro call here.
