Are I Bonds the Best Risk-Reward Ratio Around?
You are losing money in your sleep. No, I am not referring to opportunity costs, I’m referring to inflation. The inflation rate is at a whopping 8.54%. What does this mean? Let me explain: The national average interest rate for savings accounts is 0.06 %, according to Bankrate’s April 27 weekly survey of institutions. This means that inflation is 8.48% higher than the average savings account interest rate. In other words, you’re losing money to inflation. During this rise in interest rates, what can we do to combat it? Simple, earn more interest.
I know that I made it sound easy, but earning a higher return than an 8.54% inflation is nearly impossible unless you’re gambling, day trading, etc. So, what can we do? I bonds are the answer. Anything with “I” in front of it is good (iPhone, ice cream, islands). Series I Savings Bonds, or as I like to call them, iBonds, allow you to save money in a low-risk product that helps protect your savings from inflation. Now you can see where the “I” comes from, inflation. iBonds are from the government, and just like regular bonds, you are guaranteed to get your principal investment back.
There are two types of iBonds, fixed and variable. Both have a maximum investment of $10,000 per year. The fixed iBond has a fixed rate and it allows you to gain the return on your money in the time frame that you choose. For example, John Doe buys a one-year I Bond for $1,000. The fixed interest rate is 7.12%. That means that at the end of one year, his $1,000 is now $1071.20. You may be thinking that $71 is a low amount, but that’s more than any amount you’ll get from a low-risk investment. He also protected himself against inflation. Now for variable iBonds.
The variable iBonds are compounded semi-annually with a new rate each time. There are many catches to the variable iBonds though. Your money has to be invested for at least one year, and if you withdraw in years one to five, you receive a penalty resulting in the loss of some interest payments. Also, the federal reserve is combatting the inflation of the U.S. dollar which means the variable iBond interest rate will decrease over time because the rates of all I bonds correlate with inflation rates.
I’ve explained Series I Bonds to you, so what will you do? You have multiple options: Keep money in a savings account (losing money), invest in the stock market (returns aren’t guaranteed), or buy iBonds (break even essentially). I will be buying Series I Savings Bonds, will you do the same? If you click on any Series I Savings Bond reference, it will take you to the site where you can purchase them. As always, it’s a pleasure writing for you all and if you have any questions, ask away in the comment section.
The U.S. Department of the Treasury announced that I bonds will pay a 9.62% interest rate through October 2022, their highest yield since they were first introduced back in 1998, according to U.S. News & World Report. These I bonds are protected against inflation and backed by the U.S. government, making them essentially risk-free investments – the only way these investments fail is if Uncle Sam doesn’t pay his debts.