On this episode of the Millennial finance podcast Financially Well, I’m going to talk about what may be your best investment opportunity right now. Or, as Money Magazine recently put it: “America’s best-kept investment secret.” In particular, I’ll tell you about Series I savings bonds, or I bonds. Based on an article that Adam Hardy wrote, I’ll discuss why these government savings bonds currently offer a 7.12% interest rate. And, most importantly, how you can evaluate whether I bonds make sense for you.
Adam Hardy is a reporter at Money who “strives to help everyday folks make sense of their personal finances.” And on November 4, he wrote an article entitled, “‘America’s Best-Kept Investing Secret’ Is a Savings Bond From Uncle Sam.” Early in the article, Hardy summarizes the reason for recent headlines about I bonds:
“The reason these government savings bonds offer such good protection against inflation is by design: the I stands for inflation. As prices for consumers go up, so do I bond interest rates. And as of this week, I bonds are paying out the second highest rate in their history: a tremendous 7.12%. That’s nearly 12 times the rate you could earn from the country’s best savings accounts at the moment.”
Many Millennials over the past decade transitioned away from traditional bank accounts at brick-and-mortar banks. They switched to high-yield savings accounts at online banks, often primarily for higher interest rates. But those interest rates have fallen steadily in recent years, to almost 0% at many banks. Millennials now look with frustration as their savings balances just sit in cash, gradually losing value to inflation. A government savings bond offering a 7% interest rate?! Anyone in this group may reasonably think that’s their best investment opportunity right now.
But before taking any action, it’s important to fully understand both the advantages and disadvantages of I bonds.
First, I want to put Hardy’s reporting into context. I regularly discuss money with other Millennials, either as their financial advisor or through a financial wellness program. Among the people I meet, I often hear some version of the same question: how can I better make my money work for me?
When and why might I bonds come up in response to this issue? To help, let me describe a hypothetical couple who would likely express this concern.
Isabel and Will each earn a six-figure salary. The high cost of living in Washington, D.C. means this income doesn’t go as far as in other parts of the country. But they’re able to save money each month. As those savings have grown incrementally over the past several years, Isabel and Will have started to feel anxious. They can see that their savings aren’t earning interest. And they’ve recently noticed headlines about potentially problematic inflation. Still, they’re hesitant to invest their savings. They both have thousands of dollars in student loan debt. They also hope to buy a house in the next 1-3 years. Exposing their cash to stock market volatility strikes them as too risky given their current circumstances.
Can I bonds help in a situation like this?
As a starting point, you should know that Series I savings bonds consist of two different interest rates: a fixed rate and an inflation rate. The U.S. Treasury sets a new fixed rate each May and November. But the fixed rate on your specific bond(s) does not change after you’ve purchased the bond. Unfortunately for potential purchasers, the fixed rate currently sits at 0%.
The inflation rate on your bond, however, can change every six months. Any change is based on adjustments to the Consumer Price Index, a primary inflation gauge for the U.S. economy. For any bonds purchased between now and the end of April 2022, you can take advantage of that 7.12% annualized inflation rate.
Here’s the aspect of Hardy’s article that I value the most: he writes in detail about both the advantages and disadvantages of I bonds. The rules that accompany I bonds are a bit too numerous for this podcast episode. But I do want to get you thinking with a few highlights.
First, a few advantages of I bonds:
Now, a few disadvantages of I bonds:
Let’s acknowledge the obvious here as I begin to wrap up this podcast episode: a guaranteed 7% interest rate for your savings seems really appealing. Even so, that doesn’t mean I bonds are the best investment opportunity for you right now.
Given the initial restrictions around I bonds, you likely shouldn’t put any emergency savings in these bonds. And how will you feel about your decision if the inflation rate for I bonds drops next spring? Your investment may not look as great in only a few months’ time. Even if the rate remains high, what is the growth — in dollar terms — actually valuable to you? Isabel and Will can’t put their entire down payment, for example, in I bonds. They can’t earn 7% on $100,000 (or whatever amount that down payment may be). Before you go through the process of opening a new investment account and dealing with the Treasury Department’s clunky website, think about how I bonds may actually change your personal finances — in both the short and medium-term. I bonds certainly will make sense for some savers.
Are you one of those people, though?
Check out Adam Hardy’s article at Money Magazine. Again, it’s called “’America’s Best-Kept Investing Secret’ Is a Savings Bond From Uncle Sam.” I encourage you to follow his writing and support him on social media. And, of course, subscribe to this Millennial finance podcast to learn more about how you can improve your own financial wellness as 2022 arrives.
[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]
Kevin Mahoney, CFP® is the founder & CEO of Illumint, a Washington, D.C.-based company that offers financial planning for Millennials. He specializes in navigating the new financial decisions that arise during our late 20s and 30s, such as repaying student loans, buying a house, saving for college, & learning to invest. In addition, Kevin also works as a financial wellness program provider to Millennial employees around the country, including group speaking engagements.
Visit Kevin's YouTube channel for guidance on young couples' most common financial discussions, including student loans, housing, and preparing for kids.