4 Pros and Cons of Buying I Bonds

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  • I bonds are a strong investment to consider these days specifically.
  • While they may be a suitable choice for you, there are some drawbacks you should know about.
  • I bonds' interest rate is tied to inflation, and they have a few restrictions.

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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