With the Federal Funds rate hovering around 5%, there are many places to park your cash and receive a good deal of interest.
Some of these investments include high-yield savings, certificates of deposit, treasury bills, and treasury notes. With so many choices, how is a saver to choose?
How to invest is a deeply personal choice, so the more information you have, the better decision you can make. However, let’s not forget about Series “I” Bonds directly from the US government.
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Interest rates versus inflation. Series “I” Bonds are unique in that they derive their interest rates from inflation. This may seem a minor distinction from the others, but let’s explore.
Interest rates and inflation don’t always move in tandem. Inflation comes from market forces, and the Federal Reserve controls interest rates.
So, that means there are times when inflation can spike before the Federal Reserve increases interest rates. This scenario can cause a unique opportunity for Series “I” Bonds.
We had such a period from May 2022 to November 2022, when the composite rate for Series “I” Bonds spiked to 9.62%. At the time, the Federal Reserve rate was 1-3%.
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Hands-free investing. More importantly, Series “I” Bonds pay interest for 30 years. That means someone else will adjust rates for you; all you need to do is relax.
I love my high-yield savings account; however, they will lower rates faster than you can imagine. I remember watching my HYSA rates go from 2.2% to 0.4% over a few months in 2020—it was heartbreaking.
Series “I” Bonds also give you some tax benefits. You only pay federal taxes (not state) when you redeem your Series “I” Bonds, giving your money the chance to compound over 30 years.
With HYSAs and Certificates of Deposit (CDs), you are vulnerable to federal and state taxes every year. This can put a damper on otherwise solid yields.
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What I love about Series “I” Bonds. These savings bonds act as individual savings accounts. Each bond has its own identity, and you can redeem the ones you want.
Series “I” Bonds consist of two rates, the fixed rate, and the inflation rate, to form the composite rate. You guessed it: The fixed rate remains the same for 30 years.
Therefore, if you redeem some bonds, you’ll want to keep the ones with the highest fixed rates. It’s nice to have a choice.
For example, when the composite rate was 9.62 for some folks, others earned 13.18% because their fixed rate was high.
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You can see a fantastic chart of the fixed and inflation rates here on the Treasury website. It shows the power of holding Series “I” Bonds over 30 years.
I also love that it’s easy to gift people Series “I” Bonds. It’s much harder to open an HYSA or CD for your loved ones.
I have a Treasury Direct account for each of my sons. It’s simple to automate my Series “I” Bond purchases to give them the power of compounding.
Some downside to Series “I” Bond investing. Series “I” Bonds can go dormant for a long time. When interest rates and inflation are low, so are bond yields.
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However, you will find the same across all other fixed-income savings accounts, CDs, and Treasuries. Typically, this is when investors seek dividend-paying stocks to satisfy their yield cravings.
The biggest pitfall to investing in Series “I” Bonds is the $10,000 annual limit. It may seem out of reach, but you can achieve this amount rather quickly when you focus.
The $10,000 limit applies to one Treasury Direct account, giving you the opportunity to invest more under different family members.
You can also add $5,000 more to your annual limit from your tax return. If you get a tax refund, this could be a great place to park it.
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Let’s get started with Series “I” Bonds. So, how does investing with Series “I” Bonds look? The best way to invest is with automatic withdrawal from your checking account.
On the TreasuryDirect website, you can set up multiple checking accounts as a funding source.
You can then schedule your withdrawals. You purchase Series “I” Bonds in denominations as small as $25. It could be ideal to buy $25 of Series “I” Bonds per week.
Once you have a few Series “I” Bonds, you’ll be able to see the current rates plus how much interest has accrued. Interest rates change every six months in May and November.
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Out of sight, out of mind. Perhaps the best element of Series “I” Bonds is that you rarely visit the Treasury Direct website.
I head over there less than once a month, and that is only because I write about Series “I” Bonds. It’s easy to save money when you don’t always see it building.
With high-yield savings accounts, your interest payments will be front and center. I get an email every month from Discover telling me how much I earned.
The TreasuryDirect website will quietly pay interest on your Series “I” Bonds. You can amass quite a collection of bonds over the years.
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Series “I” Bonds versus 30-Year Treasury Bonds. There are two other 30-year bonds on the Treasury website: 30-year Treasury Inflation-Protected Securities (TIPS) and 30-year Treasury Bonds.
Of the three, Series “I” Bonds are the simplest to understand and leverage. 30-year Bonds pay interest semi-annually, meaning you’ll have to account for that income on your taxes.
TIPS are challenging to understand, but they also pay semi-annual interest payments. Their interest rates change constantly with inflation data.
If you are not a complex investor, I recommend Series “I” Bonds for your investing goals. Only move to the other bonds if you exceed the $10,000 annual limit.
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Conclusion. The government has your back, at least in the case of Series “I” Bonds. They are excellent products, so they put an annual limit on them.
Currently, it’s easy to find a risk-free 5% yield. That won’t always be the case. With Series “I” Bonds, you can buy them and forget about them.
You’ll always get competitive rates with Series “I” Bonds, but you won’t have to scour the internet whenever interest rates change.
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You simply purchase them and let the government do all the adjustments for you. If you get a great fixed rate, you’ll be in even better shape.
Investing is all about using all available tools to your advantage. Series “I” Bonds are easy to understand, purchase, and keep.
If you are beginning your investing journey toward becoming an Elite Saver of America, Series “I” Bonds are a wonderful place to start.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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