Answer your I Bond questions and discover how to buy I Bonds, the best opportunity for investors right now!
I'm excited to talk about these Series I Savings Bonds, or I Bonds, by far the best opportunity in investing right now! Where else are you going to get a guaranteed return of seven- to 10% a year along with protection from inflation AND a stock market crash?
And yes, that is a guaranteed return paid by the U.S. Treasury. That might sound too good to be true but it is because if the government stops paying on its savings bonds…money is going to be the least of your problems folks. Seriously, I’m in the bunker with a stash of pop-tarts and lucky charms at that point.
In fact, Series I Savings Bonds are such a great investment right now, the government is limiting who can invest and how much you can put to these so I’m going to give you a complete guide on these from I Bonds explained to interest rates and how to buy them with no fees.
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What are I Bonds?
Series I Savings Bonds were started in 1998 to give investors a way to protect their money from inflation while still providing that guarantee of a U.S. government bond.
So besides the other Treasury bills, notes and bonds issued by the government, there are these savings bonds and they’re all a loan to the government and the interest rate on most of these is just craptastic!
Regular bills, notes and bonds will pay you just 3% a year to lock-up your money for 30 years. Even on the Series EE savings bond which doubles in 20 years plus pays a 0.1% annual yield, it works out to just 3.6% a year.
Uncle Sam is a cheap ass!
But those Series I Bonds…these are like the freaks of nature of the bond kingdom, the love-child of Uncle Sam and Santa Claus, because the yield is unreal.
Series I Savings Bonds Explained
And the power of the I Bond goes beyond that high yield. You see, the biggest problem in investing right now is with all the stock market uncertainty, there’s no place for safety.
Normally investors would rush to the safety of bonds or cash to protect their money from a market crash but increasing interest rates are destroying the bond market. The Vanguard Long-Term Bond Fund, ticker BLV, has lost more than 21% of its value in less than five months . And cash, with inflation at 40-year highs, it’s a guaranteed loss. You’re losing more than 8% for every year that cash sits in your account. Try to protect yourself by holding cash for five years and it’s worth less than sixty-four cents on the dollar.
Not only is the interest rate you earn on the Series I Bond guaranteed but it’s got an inflation kicker to protect your money. I’ll show you exactly how this is calculated and the I Bond rates in a minute but I truly believe, this is exactly what investors need right now. A guaranteed, high-yield investment that can protect your money from the potential for a stock market crash.
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Who is on IBonds?
And the coolest part of this, besides making a boatload of guaranteed money, is most government bonds just show a bunch of dusty old white guys. I mean, sure you wrote the Declaration of Independence, but what have you done for me lately.
The Series I Bonds feature some of the greatest and most inspirational Americans, from Hellen Keller, Dr. Martin Luther King Jr, Chief Joseph, General Marshall and ol’ Al Einstein himself!
How do I Bonds Work?
Let’s look at how Series I Bonds work then I’ll show you the rates and pros and cons.
You buy I Bonds directly from the Treasury website and I’ll walk you through that later in the video. You can buy any amount from $25 to $10,000 and the bonds earn interest every month. Every six months, the interest is added to your bond so you start earning interest on that interest…another great feature you don’t get with other bond investments.
The interest rate paid on I Bonds is made of two parts, a fixed interest you get for as long as you hold the bond and that’s locked-in when you buy it. The fixed rate is set for new bonds every six months and it’s not much of a factor, only half a percent at the most but does help boost the overall rate you get in a calculation we’ll look at.
The other part is the inflation kicker that makes these such a great investment when prices start heating up. These are set every six months according to the Consumer Price Index, that CPI report that measures the inflation on things we buy from groceries to gas and rent.
Now you see the inflation adjustments here and see how it’s really started to go up over the last year along with the surge in inflation but this isn’t the rate you get on the bonds. For the actual interest rate you get on Series I Savings Bonds, the government has a formula, because…of course it does, gotta spend your tax dollars somehow.
But it’s not too bad, mostly just two-times that inflation adjustment since the fixed rate is usually close to zero it doesn’t add much.
Series I Bonds Rates
And here’s what it comes down to, the money-maker, the I Bond Rates for savings bonds sold all the way back to 1998. Now understand, these are the current rates on each of the periods' bonds, not the rates those bonds earned throughout their lifetime. It can be confusing at first but remember, your interest rate on the I Bond changes every six months depending on the inflation adjustment.
Are I Bonds a Good Investment?
So you can see, not only are I Bonds a good investment on that historical interest rate but top it off by the fact that these are a guaranteed return. Nation, with that stock market uncertainty and the potential for a recession, you need some kind of bond investment in your portfolio but bonds haven’t provided the safety they’re supposed to all year.
The I Bonds are a perfect addition to your core-satellite strategy, substituting the bond portion of your portfolio for savings bonds and that high-yield, safe return.
Pros and Cons of I Bonds
Now as we say here on the channel, it ain’t all rainbows and unicorns . There are some downsides to I Bonds so I want to compare the pros and cons so you can see them side-by-side.
We’ve covered the pros of I Bonds already; that high-yield going higher, the protection against inflation and a stock market crash and the fact that your return is guaranteed.
There are two downside to the I Bonds. First is that inflation kicker changes every six months. You can see in this table of the six-month inflation rate, that rates have really gone up over the last year but were lower before. Now understand, these aren’t the interest rate paid on the I Bond, just part of the calculation.
Every six months, the Treasury will calculate the new inflation rate based on consumer inflation and will adjust this part of the yield. So if inflation starts falling…[yeah, not likely] then the yield on the I Bonds will fall as well.
Realistically though, the rate on these is going to be higher than 8% for the next year at least, providing that strong return and market protection. If rates come down after that, then you can sell your savings bonds and invest the money back into stocks.
That brings us to the other drawback of savings bonds, the lockup period. You have to hold your I Bonds for a minimum of a year and will pay a interest penalty if you sell before holding them five years.
Now this isn’t nearly as bad as it seems. You have to hold your I Bonds for at least a year…but with the Fed expected to increase rates for years, you’re probably going to need that protection.
I think investors will be needing the protection of I Bonds for well over a year. Beyond that, if you sell before five years, you lose the last three months’ worth of interest. This isn’t that bad either though. For example if you hold the bond for 18 months, at a 9.5% annual interest rate, you’ll still earn an annualized 8.9% on the investment even with the three-month penalty.
How to Buy I Bonds
Here I’ll give you a step-by-step to buy Series I Bonds on TreasuryDirect, a super-easy process, in fact it’s going to take me longer to explain it than it did to actually do it.
You buy I Bonds or any savings bonds directly from the Treasury so there are no fees and all your information is protected. To find the site, you can search Google for TreasuryDirect or go to TreasuryDirect.gov.
If you haven’t already, you’ll first need to open an account here in the left menu then click this Go button. For a government website, it’s actually pretty easy to use and they lay it all out for you here. You’ll need your social security number, an email address and your bank account information. Then you’ll need to set up a password and security questions on your account.
This first application page is for either an individual account or if you’re buying under a corporation or a trust, so just toggle individual and click submit.
This next screen is your contact information and I actually recorded through all this before thinking…just a minute, I don’t want all you yahoos to know my social security number. So I’ll just show the blank form. It’s all basic information; name, date of birth, social security number and driver’s license.
You scroll down and finish up with your address, at least one contact number and an email and then put in your bank account information for direct deposit. Once all that’s done, you click submit and you’re almost ready.
Then because this is the world we live in, you need to pick a security image and caption that will show each time you login. Basically, if you’re logging in and you don’t see the image you selected setting up the account…you’re in the wrong place.
Then it’s your standard password setup and trying to remember your first grade teacher’s name or any of these other questions nobody can every remember. Thanks hackers, now I spend 10 minutes a day trying to remember if my favorite breakfast is bacon and eggs or eggs and bacon.
And that’s it. You’ll get your account number by email and a one-time password each time you login and you’re ready to buy a savings bond.
When you login to your account, you’ll be able to see all your savings bonds as well as how much you’ve gifted. To buy a bond, you click on BuyDirect up here in the menu and you’ll see all the bills, notes, bonds and savings bonds available. We’ll buy the Series I Bonds here but let me know in the comments below if you want to see videos on some of these other investments.
Series I Bond Limits
Here on the purchase screen, you see there’s no fees so whatever number you put in here, that’s how much in savings bonds you get. You can buy any amount from $25 to the $10,000 annual limit.
You can also make this a one-time purchase and set it for any date or schedule repeat purchases to buy new bonds with each check. We’ll click submit and see this review screen. I’ve actually gifted the limit to each person in the family but still need to reach the limit on my account. If everything looks good then click submit and you’re all set.
You’ll get a confirmation sent to your email and the next time you login to TreasuryDirect, it will be updated with your new savings bond amount.
How to Gift I Bonds
Now you knew there had to be a catch…and there is. You’re limited to investing $10,000 a year on the TreasuryDirect website and up to $5,000 in paper I Bonds using your income tax refund. You’ll also need to be a U.S. citizen or resident with a social security number.
Now that doesn’t mean you can’t buy the $10,000 limit each year and just keep accumulating bonds for as long as you want that high-yield.
Another great feature here is you can gift I Bonds to someone. I set up a TreasuryDirect account for my wife and both kids, gifting them the limit each to get that high-yield on $40,000 between the four of us. Each person has that same $10,000 purchase limit for electronic bonds and when you gift, it goes against their purchase limit, not yours.
Taxes on I Bonds
Now you knew we had to talk about taxes because Uncle Sam is always going to get his…which is pretty messed up if you think about it. The government is going to collect taxes on interest it paid you for loaning the government money…[you suck government!]
But Uncle Sam isn’t a total hypocrite. You’ll owe federal income taxes on the interest collected but won’t have to pay state or local taxes. That’s better than most stocks or bonds where you pay taxes at the state and local level. You also won’t owe those taxes until you sell the bond and collect your interest, so potentially years deferring the tax amount on your bond.
Read the Entire Series on Types of Investments