“Alright,” I hear you cry, “I’ve put $5,500 in my Roth IRA and I’ve put $10,000 in that new fangled high interest checking account you’re yammering on about, but I need to put money aside for a down payment on a house in a couple years. I need something safe that will earn me something.”
Quiet your cries. I’m about to introduce you to the safest investment that I’m aware of, the United States series I Bond.
What’s an I-Bond?
A bond is a loan. You give money to an institution of some sort, like the US government and they promise to pay you back, plus interest. Most bonds are for a fixed time period. If you’ve ever heard the phrase “ten year treasury”, that refers to a ten year loan to the United States government. A couple years ago there was some fear that the US might default on their debts. Had this happened the overwhelmingly likely scenario is that the US would have missed an interest payment, then made the bondholders whole after it got its stuff sorted out. The risk that you loan the US money and it doesn’t pay you back is so small that it is often described as a risk-free investment.
What if inflation takes off while you’re holding the bond? You might come out ahead in dollars, but behind when you try to actually buy something with your money. The series I-Bond is special in that you get paid a fixed interest rate like a normal bond, but you also get a variable interest rate payment, depending on what the inflation rate is for that period. The I-Bond offers an additional layer of safety, not just the US guarantee of repayment, but also protection from inflation risk.
Inflation
Since 1900 the dollar has lost 95% of its value. Every year the price of most things you buy increases by a small amount (averaging 4% since the creation of the federal reserve). The huge advantage of the I-Bonds is that if inflation starts to head up, your money won’t lose value, you get paid the inflation rate! If someone mentioned inflation to you in the last 5 years or so (generally in panicked tones) they probably tried to convince you to buy gold at the end of their spiel. I don’t have an opinion about gold. I do know that the price of gold over the last four years has fell by about 40%. If you invest in I-Bonds you will not lose 40% of your money. I promise. There you have it, my promise and the promise of the US government. How do you beat that?
The Catch(es)
There always seems to be one. In this case there are two. The first is that you can only buy up to $10,000 worth of I-Bonds every year. I-Bonds are a really good deal, so good a deal that the US can’t just let people purchase an unlimited amount. The second is that for one year you can’t get your money back out, and if you take your money out before five years are up you have to give back the last three months of interest. Last, that fixed interest rate I mentioned? Well, its currently 0%. I-Bonds you buy now will just earn inflation, and nothing more. If you buy I-Bonds in the future, when the interest rate goes back up you might get something extra as well.
Bonus Round
There is one thing I almost didn’t mention about I-Bonds. If you use them to pay for qualified educational expenses and you make less than $76,000 (113,950 for couples) per year you don’t have to pay any federal or state income tax on the interest! This makes I-Bonds a great way to save up for those classes you were planning on taking.
Bottom Line
I-Bonds offer safety that you simply can’t get anywhere else. Some people worry about what the federal reserve will do. With I-Bonds, you don’t need to. Inflation taking off? I-Bonds have you covered. Fed raises interest rates? Future I-Bonds you buy will have a better fixed rate attached to them. They won’t blow the lights off the wall, but they are safe, and some (not all) of your money should be invested in a way that is totally safe. So check them out at the US treasury’s website: http://www.treasurydirect.gov.
Adam Woods is a physicist. His research interests include building software to run and build geomagnetic models. Adam got interested in personal finance in the great recession when it became obvious an interest was necessary.
After harassing his friends and family (and a short intervention) he took to the web where he blogs about finance, investment, politics, and economics.
Adam is currently located in Boulder, Colorado where he can generally be found hiking, biking, or running a D&D campaign. He can also be contacted at adamwoods137@gmail.com.
One drawback with I-bonds is the inflation protection the offer is often calculated on the basis of the last six months. So, in an aggressive inflation environment I bonds may not provide 100% protection for this reason.
James