The Snowball Wealth Financial Roadmap
Gas prices are high, and so are food prices. Unless you have been under a rock, you know that inflation has been roaring for the past year. The inflation rate in the U.S hit 8.5% in early March, the highest since 1981. This leads to questions about where to place money and receive a return that can save you from inflation.
This has led many to look into Series-I Savings bonds. A Series-I savings bond is a security issued and guaranteed by the United States treasury that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. Interest is added to the bond monthly and is paid when you cash the bond. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.
You can invest as low as $25, or as high as $10,000 into these bonds per calendar year. If you use your federal income tax refund, you can snag an extra $5,000 for a total of $15,000 per year. You can also purchase these bonds as a gift for others.
Part of the reason people are so excited to purchase these bonds is that currently the interest rate that you will receive on them is 7.12% if you purchase by April 30,2022. That rate is guaranteed for the next 6 months. Those interest rates are projected to increase to 9.62% in May 2022. That projected rate will also be guaranteed for the following 6 months. If you are looking to combat inflation, this is a great alternative to storing money in bank accounts that are paying less than 1% interest right now. So, how can you know if this a good option for you?
Check out our financial roadmap to see where you fall and what next steps you should consider!
The major pro is that the current rates on these bonds is high. Especially considering that you are not taking on the risk of investing in the stock market or other risky assets to receive the return. These are currently one of the safest investments available. With these bonds, your value can never go below what you invested and the interest rate will never go below zero. It’s not very often that we come across a deal like that.
The interest that you earn is exempt from state and local taxes, although you will still need to pay federal taxes on the interest earned. You may also avoid the federal interest if you use the money for higher education. Those who are looking to store their money for a couple of years in a place that will allow them to keep up with inflation may find a good deal in I-bonds right now.
One con to purchasing I-bonds is that your money will need to stay committed for a minimum of one year. If the money that you are using to purchase I-bonds is for an emergency fund, or money that you will need within a year- this could present a problem. After one year, the funds can be withdrawn. However, you will lose 3 months of interest if you don’t hold the bonds for at least 5 years. Keep in mind that even if you lose 3 months of interest by taking your money out after one year, you will still make an attractive return.
After 5 years, there is no penalty for redeeming them. One strategy that many experts suggest is putting only part of your emergency fund into these bonds. The main concern is ensuring that you can hold the money for at least one year. For this reason, most people would not put all of their emergency fund into I-bonds.
Another consideration around these time frames is whether you believe inflation will continue to rise. If inflation stays high, the yield will stay high as well. Since these bonds are tied to the rate of inflation and the rate on the bonds will change every 6 months, the current rates may not stick around. That doesn’t mean you will lose money, it just means these high rates that are currently being offered may not last long.
After reading this you may have decided that I-bonds aren’t the most attractive option for you, but you would still like to earn some money to combat inflation. There are alternatives that don’t include the risk of investing in the stock market.
One is using bank bonuses. If you have direct deposit and can open a new account, many banks are offering bonuses for opening a new account and setting up direct deposit. Many banks don’t even ask for a complete direct deposit, meaning you can send part of your pay to the account and keep the rest in your current bank account. Another option is you can split your paycheck and obtain multiple bank bonuses.
Let’s say you receive a bank bonus of $300. That money will be paid to you within the year and all you had to do was change your direct deposit. Of course, you will need to be cognizant of potential fees. The best banking offers will include no monthly maintenance fees.
If you were planning to invest $3,000 into I-bonds, you would need a return of 10% to get $300. Since the interest rate on I-bonds is currently less than 10%, the bank bonus is a more attractive offer. Not to mention, many of the bonuses allow you to continue to spend from the account as you please. This leaves you with more flexibility than I-bonds since your money would be locked up for a minimum of one year.
Do your due diligence with any bank bonus first by ensuring that you understand the terms and conditions. One cons to a bank bonus is that it is typically taxable.
Furthermore, if you planned to put more money into I-bonds, you may have received more interest than the bank bonus. Your individual numbers will vary.
So, how do you buy I-bonds? They must be purchased directly through the Treasury Direct website unless you use a paper form to purchase them using your federal income tax return. Once you visit the TreasuryDirect website, you will be prompted to create an account using 3 steps. First, you will choose the type of account you are opening. Then you will provide personal information, and choose a password. You will need to link a bank account and make the purchase online. It’s a simple 10 minute process.
You are limited to $10,000 per calendar year for individuals or using your federal tax refund to buy an extra $5,000 in paper I bonds. There are redemption details for each one here.
You may also buy more I-bonds through businesses, trusts or estates. For example, a married couple with separate businesses may each purchase $10,000 per company, plus $10,000 each as individuals, totaling $40,000.
In short, if you believe inflation will continue and you need a hedge from it, I-bonds are an attractive option. They just aren’t the only option. Check out our intro to investing video, here.
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Anna Paul, CFP® currently serves as Money Coach at Snowball Wealth, Inc. Before joining Snowball Wealth, she worked as a financial planner as well as a financial education project manager delivering financial education sessions to Fortune 500 companies. She specializes in helping individuals identify financial goals and take actionable steps towards achieving them. When she isn’t giving financial education presentations, she can be found hiking, couponing, or trying new recipes.