Inflation sucks, but there is one upside: It’s still a great time to buy a government-backed I bond.
The guaranteed rate of return for an I bond is currently 6.89%. That means if you buy an I bond today, you’ll lock in that variable rate for the next six months. When inflation eventually starts falling from this year’s highs, I bond interest rates will go down, too.
Before you run to the Treasury’s website, there are a few things you should consider, according to two money experts. It’s a good idea to “take your time to understand the bond market, how it’s taxed, what the restrictions are, and your current financial situation” before buying one, says Krystal Todd, a CPA and popular personal finance figure on the TikTok.
Rita-Soledad Fernández Paulino, a former public school math teacher who’s now the founder of financial literacy platform Wealth Para Todos, says you should only invest in I bonds if you have a short-term savings goal for something you want to accomplish in one to five years, like a down payment on a house or a big vacation.
“We’re saving with a purpose,” she says. “We’re not just saving to save. Series I bonds are just a good use for getting a higher rate of return on short-term savings goals.”
To figure out whether a Series I savings bond makes sense for you, Todd and Fernández Paulino recommend asking yourself these four questions — whether you’re a seasoned investor or a beginner.
1. Do I Have an Emergency Fund?
Prioritize building your emergency fund before putting any money away in an I bond.
Emergencies happen – whether it’s a car repair, a job loss, or medical expense — and you’ll want quick, easy access to your cash should an unexpected cost arise. Fernández Paulino recommends having at least three months’ worth of expenses in a liquid bank account, such as a high-yield savings account. Many experts recommend saving up to six months’ worth of expenses, but even just a few extra dollars each paycheck can help you feel more secure in the face of an emergency. Start with a smaller, shorter-term goal and increase your savings over time.
If you already have a well-stocked emergency fund and extra savings, it might make sense to consider putting money you have set aside for a specific upcoming expense — otherwise known as a sinking fund — into a Series I bond while rates of return are at their current record high.
How to Buy I Bonds
If you want to buy an I bond, you’ll need to go to TreasuryDirect.gov, make an account, and fill out an application. Have your Social Security number, driver’s license, and bank account information, on hand to make the process smoother. You’ll be able to purchase up to $10,000 in electronic bonds per year, but you can use your tax refund to purchase up to an additional $5,000 in paper bonds, bringing your potential total to $15,000. If you get stuck, we have a more detailed step-by-step guide to purchase I bonds.
2. Do I Have Debt With an Interest Rate Above 6%?
If you’re carrying any debt with an interest rate above 6%, you may want to pass on I bonds. You’ll lose more money to interest on your debt than any interest you earn on an I bond, especially since I bond rates will likely drop back down over time, according to Fernández Paulino.
“The interest you’re earning isn’t going to change your net worth if the interest on your debt accumulates,” she says.
Todd agrees with that thinking: She says that if you want to invest in an I bond but have credit card debt, it would make more sense to pay off the debt because the average credit card interest rate is 17%.
“A 17% return after paying down debt is better,” Todd says.
3. Do I Have a Pile of Savings?
It makes more sense to invest a lump sum of cash in an I bond than dollar-cost averaging, according to Fernández Paulino. “Would I buy $50 of series I bonds every month? No, because I’ll have to wait 12 months before I can access each one of those I bonds,” she says, adding that putting a larger amount of money to work right away takes full advantage of the current I bond rates, compared to smaller amounts over time.
4. What’s My Investment Horizon?
Consider your investment horizon before investing in I bonds.
Are you OK with locking your savings up for at least a year? Because you won’t be able to cash your I bond out before a year passes after you buy one. If you cash out an I bond before five years, you’ll be penalized three months of interest. That’s why Fernández Paulino suggests leveraging them for savings goals that are one to five years out.
If you’re trying to save for retirement, Todd says I bonds aren’t the best way to grow your money over a long period, especially if the Federal Reserve can get inflation under control. I bonds pay less when overall inflation goes down.
“The I-bond interest rates have never been this high historically and have really only happened in the past year and a half, so chances are this will normalize in future years with lower returns,” she says.
For long-term investing, the stock market still wins because the returns tend to be much better with a longer time horizon. Plus, you have the benefit of compound interest on your side. Experts recommend investing in broad-based, low-cost index funds because they give you broad exposure to large segments of the entire stock market, especially if you’re a beginner.
“I bonds are good for short-term savings goals. Ideally, you also have the cash flow to contribute to your retirement account,” Fernández Paulino says. “It’s really about figuring out that balance for yourself, in terms of your financial goals.”