Inflation is currently 8.3% and the average interest rate on a savings account is 0.13%. If you compare those numbers, you’ll understand why so many people are looking for other places to park their short-term cash beyond just a traditional savings account. In this quest for a higher return, many people are turning to I Bonds.
What Is An I Bond?
I Bonds are US government bonds whose interest rate is tied to inflation. They have been around for quite a while but never got a lot of attention because inflation was so low. Until now. Now that inflation is high, other bond yields are low, and the stock market is struggling, I Bonds have stepped into the spotlight as the star of 2022.
How Do I Bonds Work?
How have I Bonds surpassed more traditional investments to steal the limelight? Their interest rate is set every 6 months based on current levels of inflation. Right now, they are paying 9.62%. Considering the fact that the stock market has averaged about 10% over the last century and I Bonds have very little risk, it’s clear to see why everyone is flocking to them.
I Bond interest rates are set every November 1 and May 1. Any purchases lock in the current rate for 6 months. Even though the rate will be reset on November 1, purchases made as late as October 28 will still receive 9.62% interest for the first six months of ownership. The subsequent six months’ interest rate will be whatever is set on November 1.
There are a few caveats to be aware of before you start thinking that I Bonds are going to be the answer to all of your investment concerns, however:
- Each individual can only purchase up to $10,000 of I Bonds per calendar year. The minimum purchase size is $25.
- You CANNOT redeem the bonds in the first 12 months that you own them. If you redeem them after owning them for one to five years, you will forfeit the last three months’ worth of interest. After you have owned them for 5 years, you can redeem them at their current value and you can own them for up to 30 years and still earn interest.
I Bonds can only be purchased directly from the US Treasury online at TreasuryDirect. If you buy some, you will NOT get any sort of physical certificate; the bonds exist only in electronic format on the Treasury Direct website.
Who Should Purchase I Bonds?
Now, I Bonds may sound amazing and they can be for a lot of people. But not everyone. I Bonds are a great option for people that have cash sitting in a bank account that they don’t need for the next 12 months. Maybe you’re saving for a house purchase in two years or a major vacation. Because your timeframe is so short, the stock market is not a wise place to put that money and you won’t earn much in a savings account, so I Bonds are a great option.
What about your emergency fund? That’s a lot of cash just sitting in the bank not earning a lot. The main goal of an emergency fund is to be accessible in the case of a financial emergency. With I Bonds, your money is not accessible for the first 12 months, so that doesn’t fit the bill. However, once the initial 12-month period is over they can be a great emergency fund because they are accessible and can earn higher rates than a savings account. So, if you’re thinking about using I Bonds for an emergency fund, just make sure you have enough cash in the bank for that first 12 months.
As you can see, I Bonds can be a good investment in the right circumstances. Remember, though, that your investments should fit your own personal financial situation and goals and not just follow popular trends. If I Bonds aren’t a good fit for you right now, that’s okay. Pass this article on to someone else and continue with your plan. What if you don’t know if I Bonds are a good fit for you because you don’t have a financial plan? We can help with that. Schedule a free call to tell us about your situation and hear how we can help you develop a plan for your finances.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.