Breaking news for all you Chief Mom (or Dad) Officers out there looking for a place to stash some cash – I Bonds, those lovely inflation indexed savings bonds, are set to have a 2.76% interest rate come November 1st. Check out this article on Seeking Alpha for more details.
Ibond, made out to you! Image from Dough Roller, who has a great overview of government savings bonds
What’s an I Bond? It’s an inflation indexed savings bond. Similar to those paper EE bonds you may have received as a gift when you were a kid, I Bonds used to be available in paper but now are almost exclusively offered through Treasury Direct online (protip – you can get them in paper versions if you choose to get them through your tax refund). Since there hasn’t been much inflation over the past few years, the rates have languished at a very low point – sometimes going negative, even though the lowest you earn is zero percent interest.
“Wait, how can you get negative interest but earn zero percent interest? That sounds like a contradiction” you’re thinking. In the government world, anything is possible. . You see, I Bonds have two components. A fixed interest rate component, and a variable component. It’s the variable component that’s going to be set at 2.76%. The fixed component is currently at 0.1%. It’s been as high as 3.4% in the past, meaning people that purchased I Bonds long ago will be earning over 5% when this change goes in. The past few years its been at 0.1, 0.2, or sometimes 0 percent. Check out this great rate chart for more details. The treasury uses both rates to calculate your interest every six months.
Now what are some downsides to purchasing I Bonds? Your money is locked up for at least a year, and if you cash out before five years you pay a three month interest penalty. In that way it’s kind of like a CD. Also the interest rates reset every six months, and its at the mercy of inflation rates. So if there’s not inflation, then you don’t earn anything. Also you can only buy $10k per person per year.
Some pros to buying I Bonds? Well, in the reverse side of the con, they protect you against inflation. Your money is locked away so you can’t easily get at it, but you can get it after a year if you really need to. It’s a good place to stash some “extra” emergency fund money. You can create an I Bond ladder by buying new bonds every year, or every month for a few years, so you always have something maturing. You can technically do this with EE bonds too, but those are only worth buying if you’re going to keep them until they double – which takes 20 years. They are an excellent option for the fixed rate portion of your portfolio.
So be sure to check out more about I Bonds and see if they may be right for you. Paying three times the interest you can get in a savings account is an attractive offer that deserves a closer look.