Suze Orman Says This High-Yield Investment 'Has Virtually No Risk'

Is this the best place to put your extra savings?

Once you've filled in your emergency fund, putting your extra money into a savings account makes little sense. The average savings account interest rate is less than 0.1% percent -- it actually sits at 0.06%! -- which makes even the best savings accounts a great way to lose value on your cash.

Many experts recommend putting your money into the stock market at that point. But, if you've seen the way the market has been going lately, you may be loath to jump on that train. And I don't blame you.

So, you may be looking for somewhere with less risk than the stock market to put a bit of cash that won't instantly lose value to inflation. Suze Orman has a suggestion for your extra cash, and it's a pretty good one: government I bonds.

In her words, "You don’t need me to explain the downside of inflation. Gas costs more. Food costs more. Just about everything costs more these days. But I want you to know about how you can benefit from inflation. I Bonds (the I stands for inflation) currently offer a very high yield that has virtually no risk."

What is an I bond?

Formally called Series I Savings Bonds, I bonds are securities sold directly by the U.S. government as a low-risk savings product. Once you purchase the I bond, you'll earn interest on it for the life of the bond, or until you cash it out.

An I bond has a lifetime of 30 years. But you can cash it in with no penalty after five years. If you need the money sooner, you can cash it in after 12 months, but you'll forfeit the interest from the three months before you cash out. You can't cash an I bond at all during the first 12 months.

How does I bond interest work?

Interest on an I bond is earned monthly, but compounded semiannually. This means the interest you earned in the previous six months is added to your principal, creating a new principal for the next six months.

For example, say you buy $1,000 in I bonds. This is the principal used to calculate your interest for the first six months. If you earn $48 in interest during that time, the principal used to calculate your interest for the next six months would be: $1,000 + $48 = $1,048.

The interest you earn is based on a combination of a fixed rate and a variable rate. The fixed rate is the same throughout the 30-year lifetime of the bond. Right now, that fixed rate is 0%. But that's not the important part.

The variable rate is updated every six months based on inflation. This typically occurs on May 1 and November 1 each year. The variable rate set in May of 2022 is 9.62%. (This is actually higher than the current estimated inflation rate of 8.3%.)

But it gets better. When you buy an I bond, you get the current rate for the first six months you own the bond. So, if you buy an I bond before October 2022, you'll get that 9.62% rate for the first six months. Then, you'll receive the rate set in October, and so on. Your rate will change every six months based on the month your bond was issued.

In other words, even if inflation drops over the next few months, you'll lock in that 9.62% rate for the first six months of your bond -- no matter what.

How much can I buy?

The downside to I bonds -- other than the penalty for cashing in early -- is that there's a limit on how much you can purchase. I bonds come in two forms: electronic bonds and paper bonds.

As an individual, you can only buy up to $10,000 in electronic bonds per year. You can also purchase up to $5,000 in paper bonds each year using your federal income tax return. Since these are separate limits, you can purchase a total of $15,000 in I bonds each year.

You can also purchase I bonds as a gift for anyone with a TreasuryDirect account. Gift bonds count toward that individual's bond limit.

Electronic I Bonds can be purchased in increments of $25. Paper I bonds come in increments of $50. I bonds are sold at face value, and there's no extra fees. So, if you buy $100 in I bonds, you pay $100.

How do I buy I bonds?

As noted above, I bonds are sold directly by the U.S. government. You can't buy them anywhere else. (Anyone else attempting to sell you an I bond is likely a scammer!)

Electronic I bonds are purchased through the TreasuryDirect website, which is run by the Treasury Department. Once you set up a TreasuryDirect account, you can start purchasing electronic I bonds (along with other eligible Treasury products). You can register yourself as the owner, as well as register a second named owner or beneficiary.

To buy paper bonds, you'll need to fill out IRS Form 8888 while filing your tax return. You can find more information here: Buying Paper Savings Bonds.

All in all, Orman is right: I bonds are about as safe an anti-inflation investment as you can make. At the very least, it's a good way to put aside some extra savings for the next few years while things (hopefully) stabilize. Just remember not to buy more I bonds than you can afford, since you won't be able to touch that money for at least the next year.