What are Series I savings bonds & should I buy them now when inflation is high?
October 06, 2022
by Jerry Zeigler
The United States inflation rate has been higher than many of us have ever seen. I was a child when the inflation rate was this high. And while I remember having to be the person who physically got up to change the TV channel before remotes existed, I don’t actually remember the high inflation rates.
High inflation is new ground for many of us. And many of us with savings are receiving less than .5% annual interest on those savings. There are some high-yield savings accounts out there as high as 2% right now. Certificates of deposit (CDs) are rather low right now too. If you are fortunate, you may find some at 2% or 3% or a little more.
In July, the actual inflation rate was 8.5%. When inflation is higher than the earned interest, the gap between the interest earned each year and the inflation rate for the year means your money loses value over time.
This actually happens a lot of the time with savings, but when the gap is up to 5% or 8% or more, many of us savers start to worry.
Are Series I savings bonds the solution?
Maybe. For some people and for some money, Series I bonds can be the solution. If you buy a Series I savings bond right now, the annual interest rate provided is 9.62%. That seems to solve the concern about your savings losing value. But let’s look at the pros and cons of using Series I bonds for your savings.
Series I Savings Bond Pros
- The I bond rate changes every six months based on inflation.
This provides much better inflation protection than most other savings methods. The current rate is in effect through October 2022. If you buy I bonds before the end of October 2022, you’ll get the 9.62% annual interest rate, but that is only promised for six months. In November, the rate will adjust – higher or lower depending on what the inflation rate is. But if you purchase a bond in September 2022, you’ll get the 9.62% for six months, and then it will change to the next rate (determined in November) and provide that rate for six months. And that continues with adjustments every six months for your interest rate.
- This method of savings is incredibly secure.
You are depending on the US government to continue to make its debt payments. If they are ever unable to pay, we probably have bigger problems to worry about besides our savings.
- Ease of set up.
You can set up to buy I bonds at treasurydirect.gov. You can also purchase I bonds using your tax refunds when you file your tax return. When you buy I bonds from treasurydirect.gov, you buy electronic I bonds. When you buy using your tax refund, you can buy paper I bonds.
- When you do cash in your I bonds, it is relatively quick.
For electronic bonds, it may take a few days for the transaction to complete. For paper bonds, you can easily find a bank or credit union which will cash in the bonds immediately for you.
- Minimum purchase required is low.
The minimum purchase is $25 for electronic bonds and $50 for paper bonds.
- I bonds can earn interest for up to 30 years.
Series I Savings Bond Cons
- YOU CAN’T CASH IN AN I BOND IN THE FIRST YEAR YOU OWN IT!
Yes, you need to hold it for one year before you can access your funds again. If this money will be your emergency fund, this could be a problem as, typically, you want to be able to access your emergency fund immediately. One way to safely depend on using I bonds as part of an emergency fund is to have more money than you really would otherwise need in your emergency fund until one year has passed. For many of us, that isn’t really a good option, and that means for many of us, I bonds aren’t a good place for our emergency fund. It also isn’t a good place for any money that may be needed before one year is up.
- There is a 3-month interest penalty if you cash out before five years.
A 3-month interest penalty sounds bad, but I view it as not that bad. A simplified example: If your choice is having the money in a savings account for one year at .5% interest for a year vs. 10% (for easy math) for a year – Then which would you rather have, .5% or roughly 7.5% (after the penalty)?
- You usually won’t get interest above or much above the inflation rate.
There are actually two interest rates for I bonds. A fixed interest rate and a variable interest rate that is adjusted for inflation. The fixed rate has been 0.0% since November 2010. This means I bonds will roughly keep your money from losing value, but the money typically doesn’t grow in value. But again, this may not be all that bad when compared to other saving options.
- There are limits to how many Series I bonds you can buy.
This is another not-so-bad con. For electronic bonds, the limit is $10,000 per calendar year. The limit for paper bonds through your tax return is $5,000 per calendar year. The limit is per person for each person who owns bonds. Most of us don’t have to worry too much about these limits, but if you do, as far as problems go, it is a good problem to have.
Series I bonds were first issued in 1998. They have never been as “hot” or in demand as they are now. That doesn’t mean they are right for you. Take the time to consider the pros and cons. Consider how well I bonds fit your financial situation and your financial goals.
Do more research before buying bonds. TreasuryDirect.gov is full of important information about I bonds. Make sure your future self will thank you for the financial decisions you make today.