Are 7.12% I-Bonds A Good Savings Fund In 2022?
One question I hear a lot is “Where should I put my emergency fund?” Stocks are risky in the short-term and savings accounts are paying nearly 0%. With inflation running high, one answer is potentially a good old-fashioned US Government “I-bond.”
I-Bonds are issued by the federal government and pay a variable rate of interest based on current inflation. With inflation running high, the current rate of interest is 7.12% for I-bonds issued through April 2022. On top of that, it is generally not subject to state taxes.
Before you get all excited and try to dump all your savings into it, there are a few catches.
1 – You can only buy up to $10,000 per year. If you are married, you can each buy $10,000.
2 – You cannot access the funds for 1 year. So, make sure you have other cash savings available for an emergency.
3 – The interest rate resets every 6 months in May and November to current inflation levels. So, unless inflation continues to rise, it is likely that you won’t get that high a rate of interest for more than 6 months.
4 – If you cash it out within the first 5 years, you lose the last 3 months of interest. In my opinion, this is not a huge drawback because you can keep the I-bond if inflation is high and then redeem it once inflation is low, which means the interest lost in the last 3 months will generally be minimal.
Here’s an example of how it might work.
John buys $10,000 of I-Bonds in February. The current rate of interest is 7% annually (3.5% semi-annually). In May, the new rate changes to 4% annually (2% semi-annually). John earns $350 in interest for the first 6 months he owns it ($10,000 x 3.5% semi-annual). Note that he gets the 7% annual rate for the first 6 months he owns it even though the rate went down in May, 3 months after his purchase. His $10,350 then earns $207 in interest for the next 6 months ($10,350 x 2% semi-annual). At the end of a full year, he has $10,557.
If at that point in time, he decides to withdrawal it, he would lose $103.50, the last 3 months of interest, or half of the $207 he earned – leaving him $10,453.50. Not too terribly exciting but much better than the near 0% in savings.
In summary, if you have cash that you don’t plan to invest and don’t need in the next year, this opportunity is worth considering while it lasts!
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.