Bonds: How to Earn Almost 10% Interest
It’s no secret that for the last couple of years interest rates have been historically low. As a borrower of funds, you could hardly have asked for more over the last two years. But as a lender of funds (think savings accounts, bonds, and CDs) you weren’t able to pace inflation in your liquid accounts. Interest rates and inflation are both on the rise. As interest rates increase being aware of your saving(s) options is vital. Enter: I Bonds.
What is a bond?
A bond is a loan. You, the bondholder, loan a sum of money to a bond issuer in exchange for an agreed-upon interest rate. As a lender of funds, your primary concern is whether the borrower will return your dollars. Some bonds carry more risk than others, depending on the creditworthiness of the issuer.
Is there something special about an I Bond?
Not all bonds are guaranteed, even those issued by a government (remember, Detroit circa 2013?). I Bonds are issued by the federal government which makes them risk-free investments (technically, as the Federal Government has never defaulted on a debt). I Bonds are unique in their interest payments as their rates are tied to inflation.
What’s the catch?
There’s no such thing as a free lunch. I wouldn’t say there is a “catch” with I Bonds, but there are a couple of things to be aware of should you decide to purchase.
- There is a maximum amount of money you can invest each calendar year (currently $10,000 for electronic and $5,000 for paper)
- You must hold an I Bond for a year which means these bonds aren’t an ideal place for your emergency savings account
- After you hold the bond for a year you can redeem it at any time. However, if you redeem the bond within the first five years of ownership you’ll forfeit the previous quarter (three months) of interest.
- You’ll pay taxes on the earnings
Who does this make sense for?
Though seemingly simple this is a difficult question to answer. Investing isn’t a one size fits all approach and investing doesn’t happen in a vacuum. From a textbook perspective there are some parameters to consider:
- As mentioned before, you shouldn’t use I Bonds for short term investments (any dollars you might need in 12 months or less)
- If you have “intermediate funds” (2-5 years) an I Bond might be a great choice. Your dollars will pace inflation but bare no risk.
- If you can’t stomach the risk of the stock market, an I Bond might be a good choice for you
Of course, this list isn’t exhaustive and if you’re in doubt, always check with your investment professional.
How do I buy one?
You can purchase a bond through https://www.treasurydirect.gov/
If you have outstanding questions about I Bonds, you’re welcome to reach out to one of our Financial Guides. A member of our team is available to help you via phone, email, or chat Monday through Friday 9 AM – 9 PM EST.