Looking for a way to keep your money safe but want to be sure that it outpaces inflation? Series I bonds may be the perfect solution for you.
Here’s What You Need To Know About Series I Bonds
Back in the 1990s, money expert Clark Howard first started talking about Series I savings bonds and how they were a tremendous deal for savers because of the fantastic rates of interest.
“I’ve owned Series I savings bonds since there was an advantageous time period back in the late 1990s. I will hold them all 30 years because the ones that I bought came with two forms of payment: the current inflation rate that resets every six months and a base rate that was the cost of inflation plus a mark up that was generally 3% in the era I bought them.”
But in the early 2000s, the federal government started dropping its fixed rate attached to the bonds, and soon their total interest rate wasn’t worth a whole lot.
Now, because inflation is rising, Series I bonds are potentially a good place for you to stash cash again.
“We have had meaningful inflation that has been more significant than economists expected,” says Clark. “I have found the inflation to be more stubborn than I expected.”
Here’s what you need to know before getting started.
1. How Do Series I Savings Bonds Pay You?
Series I bonds are basically a way to profit from rising inflation. In fact, the “I” in Series I bonds stands for “inflation.” But that’s just half the picture. There are actually two interest rates you earn money from when you buy an I bond:
- A fixed rate that never changes for as long as you hold the bond (0.0%)
- A separate inflation rate that changes every six months (3.56%)
The initial interest rate on new Series I savings bonds is 7.12%. While you are guaranteed to earn 3.56% through April 2022, the U.S. Department of Treasury calculates the rate for 12 months (3.56% x 2) as an estimation of what you would earn over a year. The rate may change after six months.
Right now, the fixed rate for an I bond sold from November 2021 through April 2022 is 0.0%. This rate will remain constant over the life of the I bond. Then there’s the separate inflation rate, which currently pays 3.56% every six months and changes at the end of that six-month period.
When you add the two rates, you’re earning an annual composite rate of 7.12% (3.56% x 2).
You can keep up to date with the latest Series I savings bond rates through TreasuryDirect.gov.
2. Is Now a Good Time To Buy Series I Bonds?
Clark says now is a good time to put money in a Series I bond, especially when you compare the interest to other interest-earning accounts.
“If you go to a giant monster mega-bank, they’ll pay you one one-hundredth of one percent on your savings. If you go to an online bank, they’ll pay you half a percent on your savings. With Series I Savings Bonds, the federal government itself will pay you right now for the next six months, an interest rate of 7.12%.”
But this is important: Make sure you actively manage your I bonds by staying aware of the interest rate changes.
“Hopefully, inflation will trend down,” says Clark. “But one of the effects if inflation does trend down: At these six-month resets, what you earn will change. But compared to interest rates you can earn elsewhere right now, I think putting money into this … is a good idea. Remember, you’re locking in your money for a year.”
3. How Much in I Bonds Can You Buy?
You can buy up to $10,000 of these each year, per person. The minimum investment starts at $25 when you purchase online.
You can also buy paper savings bonds using your tax refund. In that case, the minimum starts at $50.
4. How Long Can You Hold an I Bond?
I bonds reach full maturity after 30 years. That means you stop earning interest on your money at that point. The minimum ownership is one year.
An early withdrawal penalty applies if you cash out an I bond before five years of ownership. The penalty is forfeiture of three months of interest.
5. Where Can You Buy I Bonds?
To buy Series I savings bonds online, simply go to TreasuryDirect.gov and look for the link that says “How to buy Series I” under the “Individuals” tab.
Series I savings bonds are one tool that may help you achieve long-term financial stability. But Clark warns not to confuse this purchase with investing.
“Putting money in an I bond is not investing,” he says. “It’s a method of saving and it gives you a way of knowing that inflation isn’t eating your money up — because you’re kicking past inflation.”