Struggling to keep up with high inflation? You’re not alone. The average American family is spending $460 a year more on groceries. When you take the cost of gas and utilities into account, the amount only goes up. It doesn’t help that inflation may still rise this year.
For anyone who dabbles in investing, this is problematic. If you are tracking your investment with an app, you may have realized that you are losing money due to inflation. Even if you are receiving the same returns as you were a year ago, they are worth less now.
Unfortunately, you’re probably not receiving the same returns. The S&P 500 stock index is down almost 14% from the start of the year and cryptocurrencies have plummeted. If you’re looking for a safe investment that actually yields high returns, you’re not going to have much luck.
That is, at least, unless you consider buying Series I bonds (known simply as I bonds) with your savings. Here’s what you need to know.
What are I bonds?
Savings bonds were created by the US government in the 1930s in order to provide a safe way for Americans to invest. These bonds are guaranteed by the government. In other words, unless the government defaults on its debts – something which has almost never happened – you are never going to lose what you have invested.
Series I bonds are government savings bonds that debuted in 1998. They are one of only two savings bonds that remain in existence (along with Series EE bonds). I bonds provide a variable rate rather than a fixed rate. Your APY changes over time.
Who should buy I bonds?
In general, savings bonds are not a recommended investment vehicle. I bonds are not liquid. You cannot access your savings for at least 12 months, and face a penalty if you withdraw them before 5 years are up. You only receive your interest on them when you eventually cash them out.
I bonds are therefore mostly bought by people approaching retirement age who do not need their funds to be liquid for the next few years. Since they are variable, their yield can go down in times of deflation, and you may no longer get any returns, although you won’t lose money.
In this context, you may be wondering why you would consider buying I bonds now unless you were looking for a safe place to keep your money.
Why should you consider buying I bonds now?
There is one good reason you should consider buying I bonds now. They are currently available with an interest rate of 9.62% (if bought before 28 October 2022). This is the highest ever yield I bonds have offered, and far more than you will get from any other investment at the moment.
Still, your I bonds will only yield this return for six months, and the variable rate means that the following six months may yield very little. However, that should not necessarily deter you from buying I bonds.
The world is going through some strange times at the moment. Financially, there are no guarantees anywhere. If you’re trying to make money by investing, you’re going to struggle. This seems unlikely to change anytime soon.
Since inflation is caused by so many factors which, although temporary, seem likely to stick around for a while, it could well get even worse. This could lead to more interest rate increases by the Federal Reserve. There’s a fair chance that the next rate you get with your I bonds is even higher than the current one.
How much should I invest?
If you do choose to invest in I bonds, you should go with an amount you know you can afford to have no access to for the next five years. It is worthwhile putting a nice sum of money in your I bonds that will yield a high return five years from now, improving your financial situation at that stage and potentially offering funds for investment in much better times.
There are limits on how much you can invest in I bonds. You cannot invest more than $10,000 a year electronically. You can invest an additional $5,000 in paper bonds if you use money from a tax refund.
Remember that you will be taxed on your interest when you do withdraw your funds, so take that into account when calculating your potential yield.
I bonds offer a safe investment when opportunities for any sort of yield are few and far between. That being said, they are ideal for people who have some money to put away for the future, rather than those who need to make money from their investments any time soon.
