- I bonds are a relatively safe investment.
- At a time when inflation is high, I bonds are a good bet.
It's a move that made sense for me.
As someone who's been investing for years, my strategy largely revolves around putting money into stocks. Even though stocks are fairly risky, because I'm working with a long investment horizon, I'm comfortable taking that risk. And I know that historically, stocks have delivered much higher returns than safer alternatives, like bonds. Since I'm hoping to grow a decent chunk of wealth for retirement, I hold a lot of stocks in my brokerage account.
But recently, I made the decision to put a chunk of my money into a different investment -- I bonds. And here's why you may want to do the same.
Why I bonds make sense right now
I bonds are government-backed securities whose interest rate is tied to the rate of inflation. During periods when inflation isn't high, I bonds aren't always the best bet, because even though they're fairly risk-free, they won't pay a lot of interest.
But right now, inflation is soaring. As such, I bonds are currently paying quite generously. In fact, the rate I'm getting on my I bonds right now is comparable to, if not higher than, the return I would typically generate on my stock investments. And that's why I opted to purchase $10,000 worth of I bonds.
Why $10,000? Well, that's actually the maximum amount you can invest in I bonds per year. But rest assured that you don't have to pump that much money into I bonds. You can purchase these bonds in increments as little as $25.
Should you buy I bonds?
If you have money outside of your emergency fund that you're looking to invest, then I bonds are a good choice right now due to the generous interest rates they're paying. And with I bonds, you're not taking on the risks of buying stocks.
That said, I bonds do have some restrictions. You're required to hold those bonds for at least one year after purchasing them. And if you cash them out within five years, you'll lose a few months' worth of interest as a penalty. That's an important thing to think about, because right now, inflation is soaring. But if inflation cools off, your I bonds will start to pay less.
That's a risk I'm willing to take, though. First of all, I expect inflation to remain rampant this year, even though the Federal Reserve is aggressively raising interest rates in an effort to cool things off. Secondly, even if the rate of inflation starts to drop to a notable degree, I don't expect it to plunge, which means my bonds should pay a decent interest rate for a while.
As such, I'm not worried about wanting to cash them out within a year. Will I want to cash them out within five years? Maybe. But at that point, I'll run the numbers to see if it makes sense to take a penalty in order to free up that cash.
All told, I bonds are an investment worth looking at right now. If you're not sure they're the best bet for you, invest a small amount to start with. But to me, they're a good way to take advantage of rampant inflation rather than only getting hurt by it.
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