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Today’s 4.3% I bond is a better investment than last year’s 9.6%. Read on to learn why.
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Are you thinking about investing in I bonds, but have heard that their rates have dropped from 9.6% to 4.3%? While this may seem like a huge drop, investors who buy I bonds today will do better in the long run. Here’s why.
How do I bonds work?
I bonds are 30-year savings bonds issued by the U.S. Department of Treasury. With I bonds, you earn interest based on a combination of a fixed rate and an inflation rate calculated twice a year. The fixed interest rate remains constant, while the variable rate changes to match the current inflation rate.
Both the fixed rate and variable rate are updated each May 1 and Nov. 1. Once you purchase an I bond, the fixed rate you received never changes. The variable rate, however, changes every six months based on the Consumer Price Index (CPI), which is the most widely used measure of inflation.
These bonds can only be purchased through the Treasury Direct website. Unlike other bonds, you can’t buy or sell I bonds through a typical brokerage firm. Purchase prices start at $25, and you can buy in any amount above that up to $10,000 per person, per year.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than five years, you lose the last three months of interest.
What are the benefits of I bonds?
I bonds offer a unique way to protect the purchasing power of your money against inflation. This means your investment will maintain its purchasing power over time. They are also backed by the U.S. government, ensuring that they’re a low-risk investment.
I bonds are guaranteed to never lose value, which makes them an ideal alternative to stocks or riskier assets. They can also be purchased in small amounts, starting at $25, which makes them accessible to virtually anyone.
I bonds earn interest for up to 30 years, and the interest is exempt from state and local taxes. The interest for federal income taxes are tax-deferred until the bond is redeemed.
Why today’s 4.3% I bond is better than last year’s 9.6%
But why is the 4.3% I bond a better investment choice than last year’s 9.6% bond? The answer lies in the fixed interest rate. While the 9.6% bond may seem attractive at first glance, it has a 0% fixed interest rate, which means that buyers will only earn interest based on inflation rates.
As of May 1, the fixed rate on I bonds was set at 0.9%, reaching its highest level in 15 years. This is an increase when compared to the preceding Nov. 1, 2022 reset, which was 0.4% and 0%, from May 2020 to October 2022.
With the current variable interest rate at 3.4%, those who purchased an I bond at 9.6% last year will see a significant drop in returns. However, buying an I bond today guarantees a 0.9% fixed rate on top of the 3.4%, resulting in a 4.3% return for the next six months.
Those who bought the 9.6% will only be getting the variable interest for the next 29 years. However, those who purchase an I bond today are guaranteed to always get a yield that is 0.9% higher than those who bought a year ago.
Investing in I bonds can be a smart way to earn extra income while protecting your money against inflation. The current fixed rate of 0.9% is the highest in the past 15 years, and it makes investing in these bonds a much better option than last year’s I bonds with a fixed rate of 0.0%. Make sure to stay informed about the current fixed rates on I bonds to make the best investment decision. When comparing bonds, don’t just compare the interest rates — it’s essential to know how bonds work and find one that best fits your needs.
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