I bonds currently offer an interest rate that far exceeds what you can earn from a bank savings account. Even so, they still may not be the best investment opportunity right now for some Millennials.

On this episode of Financially Well, the finance podcast for Millennials, 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 9.62% interest rate. And, most importantly, how you can evaluate whether I bonds make sense for you.

The Inherent Appeal of a Guaranteed 9.6% Interest Rate

Adam Hardy is a reporter at Money who “strives to help everyday folks make sense of their personal finances.” And on November 4, 2021, 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% [editor’s note: now 9.62%]. 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 9.6% 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.

The Circumstances That May Make I Bonds the Best Investment Opportunity Right Now

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?

The Basic Details About Series I Savings Bonds

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 October 2022, you can take advantage of that 9.62% annualized inflation rate.

Reasons Why I Bonds May Be Your Best Investment Opportunity Right Now

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:

1. I bonds don’t incur local or state taxes. You only will owe federal taxes on the interest that you’ve earned.
2. If you’re under specific income limits, the IRS will waive federal taxes if you use the I bonds to pay for higher education expenses; and
3. The real value of your I bond will never fall below the amount that you paid, due to the inflation rate adjustment.

The Disadvantages of I Bonds That Shouldn’t Be Overlooked

Now, a few disadvantages of I bonds:

1. I bonds can’t be redeemed for at least one year.
2. I bonds cashed out within the first five years must forgo the last three months of interest; and
3. Each person can only purchase $10,000 in electronic I bonds and $5,000 in paper I bonds. These limits apply separately in the event you wish you to purchase the maximum amount of I bonds.

Putting a 9.6% Interest Rate Into (Your) Financial Context

Let’s acknowledge the obvious here as I begin to wrap up this podcast episode: a guaranteed 9.6% 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.

Why not?  

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 9.6% 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 finance podcast for Millennials 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.]

---

About Kevin Mahoney, CFP®

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.