Increase Your Cash Return With I Bonds, #84
If you listened to last week's episode, you know that owning bonds is a key part of asset allocation. However, the issue with that at present is their low return. This is especially challenging given the recent spike in inflation. On this episode, we’re going to talk about I bonds. A bond specifically designed to adjust for inflation! I’ll show you how they work, how you can invest in them, and potential setbacks with this kind of investment.
You will want to hear this episode if you are interested in...
What is a U.S. savings bond? [1:27]
How does an I bond work? [2:50]
The pros and cons of investing in I bonds [5:23]
Purchasing and planning for I bonds [10:56]
Bond, Savings Bond
U.S. savings bonds are issued by the U.S. government and are often considered one of the safest investments you can make. There are multiple types of U.S. savings bonds, however many of these are paying little to no interest at the present moment. For example, the 10-year savings bond has a rate of 1.954% interest, which is even an increase from a few weeks ago. Normally, this would be a decent return, but with inflation rising to nearly 7% and no signs of stopping, you’re likely looking at a negative return with this kind of investment.
Thankfully, there is a U.S. savings bond that adjusts for inflation. It's called the I bond and inflation is what the “I” stands for! Two components make up an I bond you need to be aware of. The first component is the fixed-rate currently sitting at 0%. Obviously, investors won’t get a return with that number. They need to look at the second component that is tied to inflation as measured by the consumer price index. The good news is that because inflation has been so high recently, the consumer price index rate is 7.2%, making I bonds significantly more attractive for investors.
Weigh your options
There are numerous benefits for investors looking to diversify their portfolios with I bonds. The first is that interest is deferred for the 30-year length of the bond unless you cash it out early. I bonds are also an incredibly low maintenance investment. The interest rates adjust every six months so you only need to check on it in May and November. There is also a huge benefit to those looking to use I bonds to cover educational costs as the interest earned is federally tax-exempt when used for that purpose.
While there are many reasons to take advantage of I bonds right now, they do have a few restrictions. You can only purchase $10,000 worth of I bonds per person, per year. That limit can be frustrating for investors who have a lot of money in the bank that is earning a nominal amount of interest. While it’s certainly not a reason to avoid I bonds altogether, it simply means that I bonds shouldn’t be your only investment strategy. Another potential hiccup for I bond investors is if they are purchasing them for their grandchildren. In this case, I bonds could disqualify college students from necessary financial aid through FAFSA because it represents an asset in the student’s name. Investors should coordinate with their children before purchasing an I bond for their grandchild. Listen to this episode for more information on I bonds!