I Bonds Have Their Best Returns Ever, But That’s About to Change. What This Money Expert Says You Should Know

An image to accompany a story about I bonds Credit: Rita-Soledad Fernández Paulino
Personal finance expert Rita-Soledad Fernández Paulino is the founder of Wealth Para Todos. She’ll be hosting a free webinar for NextAdvisor on all things I Bonds on Wednesday, October 5th at 7pm ET — details to register are below.
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It’s not just you: everything in America is more expensive these days.

Inflation is at a 40-year high. And although the Federal Reserve recently hiked interest rates again in an effort to combat the rising cost of goods, experts say high prices will persist for a minimum of several more months. If you have money sitting uninvested in a checking or savings account, inflation is causing it to erode in value.

That’s why you need to know about Series I bonds. I bonds are the government’s way of giving Americans an inflation-proof investment option. When you buy an I bond, your rate of return is locked in for six months, and rates are recalibrated biannually to pace with inflation. Since inflation is high, I bond returns are, too: the current guaranteed rate of return is 6.89%.

The catch? Like a Certificate of Deposit (CD), your money will need to stay tied up in the short term. I bonds must go untouched for one year to mature, and if you cash them in before five years, you’ll forfeit the last three months of interest. That being said, depending on your current savings and investment goals, they might be the perfect investment for you.

I asked money expert Rita-Soledad Fernández Paulino, a former public school math teacher who is now the founder of financial literacy platform Wealth Para Todos, to share real-life examples of people she advises who have incorporated I bonds into their money goals.

Here are three scenarios in which purchasing an I bond would be a smart money move.

Save for a Big Trip

If you have something big planned on the horizon, I bonds can help you earn extra spending money prior to your trip.

“I have one client, Yvette, who currently has a fully-funded emergency fund,” says Fernández Paulino. “One of the things that she’s saving for is [traveling to] the World Cup,” referring to the global soccer tournament kicking off this November in Qatar. “The trip is going to cost her $15,000. So, instead of keeping all $15,000 in a high yield savings account, we decided [last year] that it would be best for her to take $10,000 of that and put it into I bonds for a year.”

If you already have an emergency fund savings that will be easy to tap, consider putting other savings into a Series I bond while rates of return are high. The bond will outperform even the best high-yield savings accounts, which rarely have an annual percentage yield of more than 2.5%. However, a savings account is more liquid: keep in mind that you should only put excess cash into an I bond, since your money will need to mature for a year to bypass early withdrawal penalties.

Plan Ahead for Buying a House 

If you anticipate buying a home in the next five years, but not in the next twelve months, Series I bonds provide stable, reliable returns during even the most turbulent of markets.

“Another client of mine, Tanya, is saving up for a house,” says Fernández Paulino. “She’s putting money in series I bonds. We made this decision to do I bonds instead of a taxable brokerage account because of the timeframe it’s going to take for her to buy a house.” Fernández Paulino’s client is purchasing I bonds for multiple family members and through her business to help maximize her returns. She purchased $10,000 of electronic bonds in her name, $10,000 in her husband’s name, and $10,000 through her business, using her LLC’s employer identification number.

Pro Tip

You can invest $10,000 in electronic I bonds and $5,000 in paper I bonds per year per Social Security number or employee identification number (EIN). This includes children, although a minor’s account must be created within a parent or guardian’s TreasuryDirect account. I bonds you purchase as gifts for others do not count towards your individual total.

For example, a family of five could elect to put $50,000 away in I bonds at a time, which — if done this month — would yield a six-month guaranteed return of 9.62%. I bonds promise their return rate for six months from the day they were purchased.

“I bonds are like a sinking fund,” adds Fernández Paulino, referring to a strategy in which you put away money in a separate account solely to save up for a big-ticket splurge. “Think about where a Series I bond should be in terms of list of priorities. I would still say to prioritize your Roth IRA contributions before Series I bonds.”

Related: A Backdoor Roth IRA Lets You Grow Tax-Free Wealth Even If You’re Over the Income Limit. Here’s a Step-by-Step Guide

Create a Children’s Fund That Others Can Contribute To

A cool feature about I bonds that may appeal to families is that, when you add your child as a minor under your TreasuryDirect account, anyone can contribute to them. Series I bonds purchased by others can be gifted; TreasuryDirect has specific instructions on both gifting and how to set up an account for a minor

“My client Abdullah wanted to set up these accounts for her kids so that, during the holiday season, instead of people getting her kids gifts, they can contribute to their savings,” says Fernández Paulino. “This is only possible if she already has an account set up for herself as well.” Remember that friends and family members who want to buy electronic bonds as gifts must also have a TreasuryDirect account set up themselves.

Related: I Bought My Son Series I Bonds on the Glitchy Treasury Website. Here’s a Step-by-Step Guide to Avoiding the Headaches

Want to Learn More About Series I Bonds?

I bond rates will change on November 1st, and the rate may lower as inflation slowly gets under control. Join us live on Wednesday, October 5th at 7pm Eastern time for a free webinar with money expert Rita-Soledad Fernández Paulino all about Series I bonds, with open Q&A throughout.

Register here or by clicking the image below.

Free Webinar: Series I Bonds 101
Join personal finance expert Rita-Soledad Fernández Paulino on Wednesday, October 5th at 7:00pm ET for a free live webinar all about Series I bonds. Click this image to register.
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