Understanding I Bonds and Their Current and Growing Popularity
With rising inflation rates, it is natural for Americans to worry about the value of their dollar. Over the past several months, the average consumer's paycheck does not meet the same budgetary expectations as before, with many citizens complaining about rising grocery costs and other essentials.
As inflation continues to rise, investors are trying to find savings opportunities to protect their current purchasing power. While many savings vehicles exist, few are more capable than the I bond, a non-marketable bond designed for low-risk investment strategies, earning both a fixed and variable interest throughout the life of the certificate.
Why Are I Bonds Gaining Popularity?
I bonds are gaining popularity because the current financial climate is the precise reason these bonds were created. The I bond is a U.S. savings bond designed to protect against inflation, meaning consumer investors preserve their cash value.
Currently, I bonds are seeing rising interest promises, but it is crucial to note that the interest rate is variable and will change as inflation rates steady. However, as I bonds carry both a fixed and variable rate, they are still a promising investment or savings vehicle.
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Understanding the Fixed and Variable Rate Structure
The fixed-rate portion of the bond is calculated every six months — on the first business day of May and November. Whatever the rate is on that first day, it remains for the next six months. All issued bonds during that time will receive the same rate for the life of the bond, typically 20 to 30 years, with interest being compounded semiannually.
The variable rate is tied to the inflation rate, meaning I bonds currently have a high variable rate. Unfortunately, that high variable will eventually come down. The variable rate is re-calculated semiannually in May and November.
The variable rate is what makes I bonds so interesting and potentially lucrative. With an interest rate tied to inflation, you essentially protect your gains throughout the bond's life, making it a safe investment vehicle with minimal risks.
Is an I Bond the Right Investment for You?
When deciding if the I bond is suitable for your strategy, you must consider the purpose of the bond. The bond is a savings vehicle and a low-risk one at that.
While the value cannot decline and the bond is backed by the faith and credit of the U.S. government, the safety of the investment typically equates to low returns. If you want to increase your risks, a corporate or municipal bond offers higher returns, but it can lose value.
The goal of an I bond is to protect your money. When inflation is on the rise, the interest rate of these bonds is often better than other high-interest savings accounts. Still, the purpose of I bonds is to ultimately protect the value of the investor's dollar, not add great wealth.
Therefore, while I bonds are having a moment, they should only make up part of your savings and investment strategy. A combination of stocks and bonds is still preferable to putting all your eggs in one basket.
How do you feel about I bonds? Are you willing to invest some of your savings? Comment below.