Series I Savings Bonds (I Bonds) are still a great deal

 Because Jonathan Clements explained I-bond interest so clearly I am quoting directly from his Humble Dollar weekly email. Sign up at his website: https://humbledollar.com/

BILLIONS OF DOLLARS poured into Series I savings bonds toward the end of October, as investors rushed to snag the 9.62% annualized rate then on offer, which was guaranteed for the first six months. But it turns out these folks were a tad too hasty.

How so? Buyers of I bonds are promised a pretax return equal to the inflation rate, plus they sometimes also get an additional fixed rate of interest, over and above inflation, depending on when they buy. For the past two-and-a-half years, that additional fixed rate of interest has been zero. Pretty much everybody—including me—assumed it would remain that way. After all, with inflation so high and with billions flooding into I bonds, why offer anything more than a fat inflation-driven yield?

But it turns out those sneaky folks at the Treasury Department had other ideas. For the I bonds sold during the six months starting Nov. 1, the annual fixed rate has jumped from zero to 0.4%. One possibility: Perhaps the Treasury Department did this because Treasury Inflation-Protected Securities, or TIPS, are now also offering higher real yields.

The result is that, for the first six months that today’s buyers own their I bonds, they’ll earn an annualized 6.89%. But what’s really guaranteed is 3.44% for six months, or 3.24% to compensate for recent inflation plus half of the 0.4% fixed rate. Thereafter, today’s I bond buyers will get a return equal to the inflation rate, plus 0.4% a year.

What if, instead, you’d bought in October? You would pocket an annualized 9.62% for the first six months, equal to 4.81% for that six-month period. That’s better—1.37 percentage points better, to be precise—than the 3.44% that November’s buyers will collect during their first six months.

But after the initial six months are over, things start to change. October’s buyers will get a yield equal to the inflation rate, while November’s buyers will get inflation plus 0.4% a year. It won’t take many years for today’s buyers to catch up with October’s buyers, and thereafter they’ll pull further and further ahead.

All this carries something of a sting. Why? You’re limited to buying $10,000 of I bonds per year, plus another $5,000 using your federal tax refund, assuming you owe that much. On top of that, you can’t sell savings bonds in the first 12 months and you lose the last three months of interest if you bail out in the first five years. Still, October’s remorseful buyers will get another chance in 2023—when they can invest $10,000 more.

Money Tasks to Take OFF your to-do list

Don't hurry to pay off a low interest mortgage. Buy US I bonds instead. The current rate is 7.12% payable through April 2022. You can't access your money for 12 months but give up access to any mortgage prepayment anyway.  Search for I bonds on this blog for more info. 

Don't be a sucker when the ad says "supplies are limited," "only a few left" or "limited time offer or similar" effort to get you to buy now or you will lose out on savings. It's simply marketing language to get you to part with your money NOW!

Don't track every penny spent. Did I really write that? Most people don't need to obsess over every dollar they spend. Simply follow the 50/20/30 recommendations: 50% of your pay for rent/mortgage and other essential bills (electricity, fuel, etc.); 20% for savings (includes emergency fund, short term goals, and retirement contributions); and 30% for remaining expenses. Pay yourself first with an automatic saving/investing contributions. Pay bills automatically (utilities, insurance, credit cards). 

Don't fall for FOMO (fear of missing out). Skip the cryptocurrency rage and invest in time-tested strategies described in this blog: Keep expenses low, diversify and buy index funds. 

Thanks to Veronica Dagher, writing for The Wall Street Journal, 12/29/21

Inflation adjusted US government bonds paying 7.12%

With interest rates on savings ate rock bottom low, check out U.S. Government I-bonds.
NEWS: The initial interest rate on new Series I savings bonds is the second-highest ever: 7.12 percent. You can buy I bonds at that rate through April 2022.  Details at: https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Be sure you understand how I-bonds work. You can't access your funds in the first 12 months. If you cash out before 5 years, you forfeit 3 months of interest. 

But the advantage is that you do not pay state income taxes on the interest and you can delay paying federal interest until you cash out, a big advantage over traditional savings options like CDs and savings accounts. 

 

I Savings Bonds for Emergency Funds

With CD rates so low another option for emergency funds is US government I Savings Bonds. They keep pace with inflation and you don't owe state income taxes on the interest earned, only federal taxes. The main drawback is you cannot withdraw funds in the first 12 months. If you withdraw within 5 years you lose 3 months interest (very similar to early withdrawal penalties on CDs).  Consider dividing your emergency funds between CDs and I bonds. I bonds are purchased online (treasurydirect.gov). Another nice feature compared to CDs is you only pay taxes on the interest when you withdraw, not yearly (simplifies tax prep). You can withdraw partial amounts at any time after 12 months.  See:  http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm