Buzz
As inflation hits its highest peak since 1981, it’s likely you’ve felt the pinch in the rising cost of your daily essentials. But inflation is also eroding the purchasing power of the money you’ve saved in your bank account. One potential solution: U.S. government Series I savings bonds.
Let’s begin with a brief overview of bonds, which we’ve discussed before:
When you purchase a bond, you’re essentially acquiring a debt and lending money to a company (or government). Instead of directly investing in the company, you provide them with funds, and in exchange, they commit to paying you interest. This interest, known as a “coupon,” is paid on a fixed schedule and at a predetermined rate. The bond also has a
maturity date:
the date by which the issuer must repay the amount borrowed. Additionally, you have the option to sell the bond before this maturity date. Depending on
the prevailing interest rates
at the time of sale, you could receive more or less than the original amount you invested.
The interest rate you receive is called the composite rate, which is reviewed every six months in May and November to adjust for inflation. If you purchase the bonds before October 28, you’ll secure the current 9.62% rate for the first six months. For the following six months, the rate is projected to be 6.84% (still solid, though not as high), but this will be officially confirmed by the U.S. Treasury on November 1. The maximum amount you can purchase this year is $10,000.
How do Series I bonds function?
You must hold the bonds for at least one year before cashing out, and if you redeem them before five years, you’ll forfeit the last three months of interest as a penalty for early withdrawal. However, even with that penalty, your money will still grow more than it would sitting in a savings account.
You can only purchase them through the U.S. Treasury website. Creating an account takes about 10 minutes, and you’ll need a Social Security Number, along with U.S. citizenship, residency, or civilian employment with the U.S. government to qualify. When setting up the account, unless you’re purchasing for a business or trust, choose the “individual account” option, and enter your personal details along with the bank account that will be used for the funds. Then, follow the step-by-step video tutorial to guide you through the bond purchase process.
Is purchasing I bonds a good idea?
Series I bonds offer a strong option for individuals with savings in the bank who won’t need access to the money for at least a year. Even if you withdraw the funds after a year and face a penalty of three months' worth of interest, you’ll still earn more than leaving the money in a savings account. However, these bonds aren’t suitable for everyone. If you anticipate needing the funds within the first 12 months, you should avoid buying Series I bonds. This also means they’re not a good choice for your emergency savings or if you plan to borrow from credit cards to purchase them.
