Don’t Let Inflation Steal Your Savings: How I Bonds Protect You Against Rising Prices

Inflation has halted its rapid rise in July, but Americans are still penalized by high prices. June data shows American families are paying $460 more per month for essential products and services compared to a year ago.

If you’re looking to grow your savings, investments don’t help much in the short term. Stocks plummet — the S&P 500 stock index is down more than 10% since the beginning of the year, and it is after a big rise in prices. The crypto was earning big returns for a while, but now the price of bitcoin has fallen to just over a third of its high from last November.

Series I Savings Bonds (commonly referred to as “I Bonds”) from the US Treasury have an annual interest rate that is indexed to inflation and offer a low-risk way to grow your money as prices rise. There’s a limit to how much you can buy, but the current record high interest rate makes I Bonds an attractive safe haven for your money right now.

How do I bonds work, how much interest do they pay and who can buy them? Learn the ins and outs of Series I Savings Bonds to see if they might be right for you as a safe investment in uncertain times.

To learn more about inflation and investing, discover how to invest during a bear market and steps to take if you fear a recession.

What are Series I Savings Bonds?

Introduced in 1935 during the Great Depression, savings bonds were created to provide a savings vehicle for Americans, while raising money for the federal government.

The US Treasury has added and discontinued several series of savings bonds since then, including Series E Defense Bonds, which helped fund efforts during World War II and continued long after. Today, only two savings bonds remain: Series I and Series EE bonds.

Series I bonds have floating rates that are tied to current inflation data, and their interest rate can change every six months, depending on whether consumer prices have risen or fallen. Series EE bonds are linked to long-term Treasury interest rates and guaranteed to at least double in value over 20 years.

Originally sold as paper bonds resembling large checks, most I bonds are now sold electronically through the TreasuryDirect website. You can also still buy paper I bonds — currently featuring portraits of famous Americans like Helen Keller, Martin Luther King, Jr., and Dr. Héctor P. Garcia — using your tax refund.

How do bonds work?

I Bonds can be purchased electronically starting at $25. Paper bonds are currently sold in denominations of $50, $75, $100, $200, $500 and $1,000.

You can buy up to $10,000 of I bonds electronically each year, plus an additional $5,000 in paper bonds if you use money from a tax refund.

I bonds are best suited for those looking for a long-term, low-risk savings vehicle. You can’t cash in your bonds for at least 12 months, and there’s a three-month interest penalty for redeeming them before five years. Your I bonds can earn interest for up to 30 years.

You won’t receive the interest from the I Bonds or you won’t have to pay tax on that interest until it’s cashed – although you may pay tax each year on the earnings as you go . If you use I-Bonds to pay for college, you may not have to pay taxes on the interest.

How much do bonds pay?

The interest rate on the I bonds is currently 9.62% (if purchased before Friday, October 28, 2022), the highest yield this savings bond has offered since its debut in 1998. The bonds I are compounded semi-annually and the next rate will be set on November 1st.

Interest rates determine how much money you earn on your savings. I bond interest rates are calculated by combining a fixed rate that remains the same throughout the bond’s holding period with a variable six-month rate based on the consumer price index for all consumers prices (CPI-U), which includes food and energy prices. The variable rate changes twice a year on the first days of May and November.

When I Bonds were introduced in September 1998 the fixed rate was 3.40%, but the days of decent fixed rates ended with the 2008 recession – rates have been below 1% ever since. The fixed rate on I bonds has been 0% since May 2020.

A screenshot of the Buy I Bonds page on TreasuryDirect

You can make a one-time or recurring purchase of I bonds at by Peter Butler

The current variable rate of 9.62% represents the rate of inflation measured for the past year and is the interest rate you will earn on your savings during the first six months of holding an I bond. This rate has was set by doubling the 4.81% increase in the CPI (which measures average price changes of consumer goods for urban consumers) from October 2021 to March 2022.

You can learn more about how much these bonds have paid over time by looking at TreasuryDirect’s historical I bond rate chart.

Pro tip: You receive interest on your I bonds at their prevailing interest rate for six months from the first day of the month in which you to buy their. If you buy bonds in August 2022, you will receive the interest rate of 9.62% until February 1, 2023. Your rate will then adjust according to the rate of inflation between April and September 2022 for the next six months, and so on. . This interest rate lag allows you to earn money for the next six months on an inflation rate of several months ago.

Why You Might Consider Buying an I Bond

Inflation has risen 6.3% since April, so unless prices drop significantly, you’ll likely earn a lot more on your money with an I bond than with a savings account or certificate of deposit.

If you bought a $10,000 I bond today and received 9.62% interest for six months and then 6.3% interest (a low estimate) for the next six months, you would earn approximately $811 on your savings in the first year.

In comparison, the best five year old cds right now will earn you between $350 and $400 in interest on that same amount in the first year. A strong high yield savings account will earn about $200 in return, by comparison.

I bonds are considered relatively safe investments because they are government-backed and less volatile than stock market or cryptocurrency investments.

What are the risks of I bonds?

If inflation drops to zero or prices fall, your APY could drop to zero. The United States had two six-month periods – ending in May 2009 and May 2015 – during which prices actually fell on average. The interest rate on I bonds at that time fell to zero.

In that rare case of six-month deflation, you may not earn interest, but your rate will never drop below zero. This means you won’t lose money on the I Bonds (unless the the government lacks) and you will not lose any previously accrued interest.

If the Federal Reserve continues to raise interest ratesyields on deposit accounts such as high-yield savings accounts could also rise, making them more comparable to I bonds. of the last recession.

Another risk of tying up your money with I bonds is that you can’t access your funds for at least a year. If emergencies or necessary purchases arise, you’re out of luck. The Treasury allows exemptions for people who have suffered natural disasters.

Similarly, if you have to redeem bonds before five years, you lose the last three months of interest earned.

Who can buy and hold Series I Savings Bonds?

U.S. citizens (regardless of where they live), U.S. residents, or civilian U.S. federal government employees (regardless of citizenship or residency) with a Social Security number can buy electronic or paper bonds I.

To purchase e-I Bonds, you must create an online account with TreasuryDirect, which is restricted to persons aged 18 and over.

You can buy I bonds for your children or for anyone else. The $10,000 per year e-bond limit is determined by the bond holder, not the purchaser. You can buy I Bonds for as many people as you want. If you have a family of four, you could buy $40,000 a year electronically (not including paper bonds purchased with tax refunds).

Corporations, LLCs, small businesses, trusts and estates can also purchase I Bonds. Businesses and organizations are limited to the same $10,000 annual limit as individuals.

How can I buy bonds?

After opening an account with TreasuryDirect, you can purchase your electronic I bonds using the site’s BuyDirect feature. Once the bonds are in your online account, you can redeem them or transfer ownership using the site’s ManageDirect page.

To purchase paper I bonds, you will need to purchase them with your federal tax refund, using Form 8888 or the popular business tax software to show your I Bond purchases up to $5,000. Paper bonds will be mailed to you approximately three weeks after your tax return is processed.

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