What are Ibonds?
Ibonds, a type of savings bonds, are one of the safest investments someone can make.
They’re guaranteed not to decrease in value and come with no market risk. They carry the advantage that they are tied to INFLATION, so anything invested doesn’t lose it’s purchasing power.
Before we get into how to buy ibonds, a few things to understand:
There’s a HOLDING PERIOD. One must hold the i-bonds a minimum of one year before redeeming. However, even if you hold a year, there’s a penalty for redeeming prior to five years; this penalty is three months of interest. So, in order to get a full year of interest, one has to actually hold the bonds for a minimum of 15 months. With this said, this isn’t a short-term investment, you’d only want to put money into this that you won’t need within the next year. For me, an emergency fund goes into checking/savings; this is anything beyond my emergency fund that I want safe, like a down payment for a house or car that is over a year away.
How to Buy I bonds
The easiest way to purchase bonds is from Treasury Department via the Treasury Direct website. Here is a quick picture of the website (Lots of links which can be confusing)
Another way to obtain Ibonds is via your IRS refund. You can ask for your refund to be paid via these savings bonds.
The Treasury Direct website is located here:
Once at the Treasury Direct site, just click on OPEN AN ACCOUNT and then “Treasury Direct.”
ABOVE ALL, once you are in to the “open an account” screen pay very close attention to the STOP above. Most important-DO NOT use the back button EVER on this site unless you want to go through the entire process of logging in again. The back button is your enemy!
From there you get to choose whether you are an individual or Corporation. I understand that some are creating trusts to put ibond purchases in, so that may apply to you.
After this screen, you will have to fill out all of your personal information as well as banking information with routing/account numbers to fund your IBOND purchase. I’ll spare you my personal details 🙂
However, next, I’ll present to you the stuff of Legends. The infamous password entry screen that you will use to login; the thing most people despise. Talk about a relic that’s in dire need of an update. I guess, if nothing else, anyone that wanted to break into your account would be deterred by spending time on this thing, haha.
Once you are into your account, you can see the amount of ibonds you own. Please keep in mind, it will take approximately three months for you to see any interest accrue on your accounts when logged in.
How much can you purchase?
One of the biggest cons to ibonds is you can only buy so many of them. You can only purchase up to $10,000 worth of ibonds per calendar year. So, if you’d like to hold more in ibonds, one could potentially make a ladder of ibonds, purchasing 10K in say November of one year and purchasing another 10K on January of the following year. It makes sense, otherwise some millionaire could just throw a bunch in ibonds, earn 7.12% and voila talk about a huge risk-free money grower!
On the other hand, The minimum purchase is $25, so if you aren’t a millionaire, you can buy as little as you’d like. One great thing about ibonds is no brokerage fees, no spread; there are NO FEES on ibonds.
What determines how much you are paid?
Ibonds consists of two parts, a floating rate that comes directly from the INFLATION RATE, and a fixed rate. This fixed rate is announced twice a year. Currently, the fixed rate is 0%, so all interest is from the INFLATION RATE (Currently 7.12%). The interest on i-bonds is added monthly and semiannually compounded.
In the event that there is DEFLATION, the variable rate is essentially subtracted from the fixed rate. At the same time, the rate of return won’t get to zero. This is only risk with ibonds. You could potentially own ibonds during inflation and if the fixed rate isn’t high enough, your return would nearly be zero.
I bonds stop earning interest after thirty years, so you can’t just sit back and collect interest for your entire life. This is also an important consideration if you plan on passing these on to a loved one after you pass away.
I think in this current inflation rich environment, money that you are saving for a larger purchase, that you want safe-ibonds present a good place to park these funds. My high yield checking account is currently paying 1.5% and most of my dividend stocks are only 5% at most, so 7.12% seems like a no brainer for money you want to keep safe.