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Running Out of Time for I Bond Decisions


If you want to lock in a guaranteed short term 5% yearly return, you'll need to buy I Bonds in the next few days to ensure it'll be issued this month. If you're more concerned for the long term, you might also want to buy I Bonds this month. But for that case, it's not so simple.

14-Month 5% APR

US Series I Bonds are a nice alternative to bank certificates of deposit. Unlike CDs, the rates change every 6 months, so they can be hard to compare to CDs. However, for I Bonds purchased this month, you can get a guaranteed annual rate of return of about 5% for a term of about 14 months (see post for more info). That's much better than any CD you can get nationally with a similar term (see post).

Long Term Investment or Emergency Fund

Typically, I Bonds are best for a 5-year or more investment. They won't give you the long term appreciation of stocks, but at least they do guarantee you'll stay ahead of inflation. They can also be useful as an emergency fund if you can live without the initial 1 year when they can't be redeemed. The main reason I like them as emergency funds is that you don't pay federal income taxes on the interest until you redeem them. If you save them for an emergency like a job loss, you can redeem just the amount you need and the interest earned on the redeemed I Bonds will be taxed at your current income level. If the emergency is a job loss, you'll likely be in a lower tax bracket for that year.

So if you're planning to purchase I Bonds as a long term investment, the short term inflation based rates are not too important. Sometimes they'll be high like the next 6-months. Other times they'll be low. But overall, they'll average out. What's important is the fixed rate component. This rate remains constant for the life of the I Bond and is set by the Treasury every May 1st and November 1st. It has been as high as 3.6%. For much of 2004, it was only 1.0%. Last May it increased to 1.2% where it stands now.

Predicting the I Bond Fixed Rate

The big question is how will the I Bond fixed rate change in November. If you think it'll go up, you should wait till November to buy. If you think it'll go down, now is the time to buy. There's no consensus amoung the experts, but my best guess is for a rise of 0.2% to 1.40%. This previous post has all the details on this question.
Ari Socolow
Ari Socolow   |     |   Comment #1
Great info on the I-Bond and its value as an effective cash equivalent. Interesting viewpoint on the reset. Would you be interested in summarizing your info and publishing it on BestCashCow.com as a guest commentator? Sincerely, Ari Socolow, BestCashCow.com