I Bonds: A Predictable Way to Earn Interest

I Bonds have garnered more spotlight over the past couple years than they have had in a couple decades or so. Let me show you what I Bonds are, how they work, and who can benefit from them. 

What are I Bonds?

I Bonds are bonds issued by the federal government. They are used for a various number of different projects similar to that of municipal bonds or even corporate bonds.

If you are unsure about how bonds work or even what bonds are, here is an article to help explain them.

I bonds accrue interest semi-annually (most bonds pay semi-annually).

When you earn interest on your bond, it will simply be added to the principal balance. So if you have a $1,000 bond and it earns $8 in interest over the period, when interest is accrued again, it will be accrued on $1,008 and so on.

I Bonds have two components to their interest rate. 

1. The fixed rate:
   1. The fixed rate never changes over the life of the bond (30 years). It is set every May and November.
2. The semi-annual inflation rate:
   1. The inflation rate changes every six months (every May and November). This number is based on the Consumer Price Index for all Urban Consumers. It might be one rate from May until November and then change to another rate after November.

Hers is an example of how it works.

You buy an I Bond that has a fixed rate of 1.3% and a semi-annual inflation rate of 2.05%.

That means that your bond will have a combined rate of 5.4%.

(While the exact interest rate will be slightly different, the calculation is fairly complicated. This combined rate will be very close to the actual rate that you will get.)

So if you were to purchase a $10,000 I Bond with a combined rate of 5.4%, you would earn 2.7% interest on May 1 and 2.7% interest on November 1.

On May 1 your $10,000 bond will now be worth $10,270.

And on November 1 your $10,270 bond will now be worth $10,547.29.

The fixed rate of your bond will not change for the life of it (30 years). But the next year, you will likely have a different inflation rate with your bond. That will change the calculation for year 2, year 3, and so on.

It is also important to note that you can only put $10,000 into I Bonds per tax entity per year. This means per social security number or EIN. (You only have one SSN, but you can open as many EINs as you would like.)

Who Can Benefit From I Bonds?

I bonds can be beneficial for a number of people. However, if you are just now starting your investing journey, don’t worry about I bonds. Focus on your 401k, Roth IRA, and/or Traditional IRA.

There are three main benefits from I Bonds.

1. They are very stable and safe. Since they are backed by the full faith of the US government, there is an extremely low chance that you would not get your money back.
2. They are state tax free. Yes, you will have to pay federal tax on them but not state or local tax.
3. They provide a steady and predictable stream of earnings which can be beneficial for someone who needs that.

If these benefits do not tickle your fancy then consider investing in your regular retirement plan, ETFs, mutual funds, etc.

Final Thoughts

I bonds are not for everyone. If you are an extremely high earner or you want/need regular and predictable interest, then consider these.

I have said it many times. There is an investment vehicle for any investment appetite out there. This is just one more of them.

I am here for you!

Until next time!