Should You Buy I Bonds Now That They're Paying Less Interest?
- The interest rate on I bonds can fluctuate based on inflation levels.
- While I bonds are paying less now than in October, they're still a good idea.
Here's why it's still a good idea.
There's a reason so many investors rushed to purchase I bonds in late October, to the point where the U.S. Treasury website actually crashed. I bonds are government-backed bonds whose interest rate is pegged to inflation. In October, I bonds were paying an initial interest rate of 9.62%. For an investment that carries minimal risk, that's a really solid return.
But in November, the interest rate on I bonds fell to 6.89%. And clearly, that's a far cry from 9.62%.
Despite that reduction, I bonds are still an investment worth owning. And if you haven't purchased any this year, it could pay to add some to your portfolio before 2022 wraps up.
Why I bonds still pay off
The interest rate on I bonds changes every six months based on inflation. Because inflation has moderated somewhat over the past couple of months, I bonds are now paying a lower interest rate than what they were paying earlier this year.
But it's still worth scooping them up to score a 6.89% interest rate. While you might earn a higher return by investing your money in stocks, with stocks, you take on a world of risk. Just look at how the market has performed this year. Stocks have been volatile since January, and many investors are now seeing pretty big losses in their brokerage accounts.
I bonds are a far safer pick than stocks because they're government-backed securities. So if you buy $10,000 worth of I bonds (which is the maximum amount you can purchase in a single calendar year), you won't have to worry about not getting your $10,000 back, or that your $10,000 in I bonds will only be worth $6,000 one day due to market volatility.
Now the one thing you do have to worry about with I bonds is their interest rate dropping over time. If inflation cools off a lot (which is something consumers desperately want), the interest rate on I bonds could fall to a lot lower than 6.89% in time.
But the good news is that you're only required to hold I bonds for a year, and from there, you can cash them out. Now if you cash them out before five years, you will face a penalty -- but that penalty may be worth paying if it frees up your cash for a more lucrative investment.
How to buy I bonds
You can't buy I bonds through your brokerage account, which is how you may be used to buying stocks. Instead, you'll need to create an account on TreasuryDirect.gov, which shouldn't take too long. You'll also need to choose a checking or savings account to link your account to, since money will need to be taken out of one of your accounts to fund your I bonds purchase.
But all told, the process is pretty painless. If you're looking for a relatively safe investment that's still paying a pretty solid return, I bonds are a good choice.
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