Many financial experts recommend buying I bonds today. But should you invest in them?
Inflation is making life difficult for Americans across the nation. Consumers are being forced to pay more at the supermarket, the pump, and just about everywhere. As such, many people have, over the past number of months, been forced to tap into their savings accounts or rack up debt just to keep up with basic expenses.
Making matters more complicated is that the stock market has been extremely volatile this year, and many people have seen their brokerage account balances tumble. And so at a time when living costs are soaring, it can also be difficult to figure out where to invest any money that isn't being spent on essentials.
But because of the current state of inflation and the stock market, now may actually be a really good time to invest in I bonds. In fact, financial guru Suze Orman has gone as far as to say that I bonds are the best investment you can make right now.
But are I bonds right for you? Here are some benefits and drawbacks to consider.
Pro #1: Higher interest rates when inflation is rampant
I bonds are government-backed securities whose interest rates are pegged to the rate of inflation. Right now, inflation is soaring. And that means I bonds are paying a lot of interest, which is something worth capitalizing on.
Pro #2: A stable investment
When you buy stocks, there's always the risk that the shares you purchase will be worth less money at some point in time. The same risk also exists when you buy bonds issued by corporations (though it's lower than it is with stock shares). The beauty of I bonds is that they're backed by the U.S. government and, as such, they can't lose value. So if you buy $1,000 in I bonds, you're guaranteed that your bonds will be worth that $1,000 when you go to redeem them.
Con #1: I bonds don't always pay generously
The rate of interest I bonds pay ties directly to inflation. Right now, because inflation is high, I bonds are paying a lot. But during periods when inflation is low, I bonds may not be your best wealth-building tool. So if you buy those bonds now, you might enjoy a nice amount of interest in the near term -- but that could change over time, leaving you stuck collecting less interest.
Con #2: I bonds come with restrictions
I bonds are considered a longer-term investment, and if you don't treat them like one, you could face penalties. First of all, you cannot redeem I bonds until you've held them for one year, so you do need to make that commitment up front. And then, if you redeem them before having held them for five years, you'll be penalized to the tune of a few months' interest.
Are I bonds right for you?
Right now, I bonds are an appealing investment because they offer the opportunity to earn a generous rate of return on an asset that's guaranteed not to lose value. This isn't to say that I bonds are perfect for everyone. But it could pay to consider adding them to your portfolio while inflation is soaring.
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FAQs
As you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.
What are the pros and cons of I bonds? ›
I Bonds: Pros & Cons
| Pros | Cons |
|---|
| Interest rate adjusts every six months based on current inflation rates | Cannot redeem I Bonds during the first 12 months |
| No State or Local income tax on interest earned | Three months interest penalty if cashed out during the first five years |
2 more rowsAs you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.
What are the pros and cons of buying Treasury bonds? ›
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
What are the disadvantages of TreasuryDirect? ›
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
Is there a downside to buying bonds? ›
Cons. Bonds are sensitive to interest rate changes. Bonds have an inverse relationship with the Fed's interest rate. When interest rates rise, bond prices fall.
Are I bonds a good investment in 2024? ›
Yes, 4.28% is the current inflation interest rate if you purchase the I Bonds before October 31, 2024. The previous I Bonds interest rate was 5.27% for November 2023 to April 2024. This also means that the composite rate is also an annualized 4.28% for the first 6 months that the bond is held.
What are the pros and cons of issuing bonds? ›
Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.
What are the disadvantages of an investment bond? ›
Cons
- Typically, money is tied up for at least five years and early cash-ins might result in significant penalties.
- Returns are not guaranteed, and the value of the bonds can fluctuate, potentially not covering care costs.
- Various charges apply, including initial, annual and cash-in charges.
Bottom Line. Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
May 7, 2024
Overall, I bonds are safe investment options if you want to protect yourself from inflation and earn a decent return. They may not offer the high returns of riskier investments like stocks. But they provide a low-risk alternative that can provide a guaranteed return and help hedge against inflation.
Can you lose money on bonds if held to maturity? ›
After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
What are the disadvantages of Treasury I bonds? ›
One main limitation is that these bonds cannot be bought or sold on the secondary market. This means that once you purchase an I Bond, you are committed to holding it until maturity or redeeming it with the Treasury, subject to certain restrictions. Another potential downside is the purchase limit.
Does TreasuryDirect charge fees? ›
TreasuryDirect is free. There are no fees, no matter how much or how little you invest. You may hold both savings bonds and Treasury marketable securities in TreasuryDirect. Your securities in TreasuryDirect are electronic, so you don't have to worry about them getting lost, stolen, or damaged.
Do I bond still make sense? ›
I bonds have earned their reputation as an inflation-fighting tool for retirees. As of May 2024, I bonds are returning 4.28%, which is lower than the same period in 2023 but still well ahead of the inflation rate of 3.5%. The previous I bond rate stood at 5.27%, set in November 2023.
Can you ever lose money on an I bond? ›
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
Is there a better investment than I bonds? ›
Another advantage is that TIPS make regular, semiannual interest payments, whereas I-bond investors only receive their accrued income when they sell. That makes TIPS preferable to I bonds for those seeking current income.
Are I bonds tax free? ›
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
Which is better, EE or I bond? ›
While I bonds can offer better protection in inflationary times, EE bonds offer stability even in volatile market conditions.
