Are I bonds the best way to save money right now? It depends

This story is part Recession Assistance ServiceCNET’s coverage of how to make smart money moves in an uncertain economy.

With inflation still high at 8.5%, Americans are rushing to buy I bonds. A government-issued investment, Series I Savings Bonds can help protect you against inflation. But is an I Bond the best savings option for you?

I bonds have both a fixed rate and an inflation rate adjusted every six months. At present, The I bonds will offer an annualized interest rate of 9.62%meaning they will provide you with higher returns than any other federally backed bank or brokerage account.

The attractive yield has prompted Americans to open more than 1.5 million accounts since last November. Prior to this period, there were less than a million I bond accounts in total, according to Treasury data cited in The Wall Street Journal.

With widespread concern about the current economic downturn and anxiety over layoffs, many of us are considering savings strategies to add a cushion to our financial future. Depending on your needs and goals, an I Bond may or may not work better. Here are my recommendations based on a few common hypothetical scenarios.

Advantages of an I bond

In today’s savings market, I bonds stand out for their high yields and relatively low risk. Because these are investments backed by the US Treasury, you are guaranteed to secure at least your principal, so they will never be to lose assess. With a potential recession ahead, I bonds can offer you some financial security. And while you have to pay federal income tax on earnings, I bonds are exempt from state and local taxes. If the savings are used for higher education purposes, the IRS may exempt you from paying taxes.

When an I link makes sense

  • You’re saving for a big short-term expense: Whether your goal is to pay for a wedding, a down payment on a house or a new car in the next few years, you can start saving now, safely. Investing in the stock market may not be wise, as it may take several years to recover from bear market losses. Instead, to make sure inflation doesn’t continue to erode the power of your money, take advantage of accounts like I bonds with higher annual returns so your savings don’t lose value. Remember, I bond purchases are limited to $10,000 per person per year, so if you need to set aside more than that, you can save the rest in a high-yield account.
  • You want higher returns without risk: Suppose that after paying your bills, saving in an emergency fund, and adding to your long-term investment accounts, you have a few hundred dollars to spend each month and want to get the best financial return without the risk of volatility. stock market. If you buy I Bonds with those savings, you’ll get solid returns today without taking any risk. Later, depending on your financial goals, you can decide whether it makes more sense to keep the money in I bonds or move it elsewhere.

Read more: Best CD Rates for 2022

Disadvantages of an I bond

I bonds come with chains attached. For example, you must keep your money locked up for the first year. There is also a five-year holding period during which if you withdraw money, you risk losing the last three months of interest earned. You are also limited to purchasing a maximum of $10,000 of electronic I Bonds per year. You can buy I bonds directly from the Treasury website, but the process has would have been difficult for some people. In several cases, the Treasury was unable to confirm the identity of individuals, requiring additional steps and reducing bureaucratic red tape.

When an I link doesn’t make sense

  • You are investing for the long term: If you want to grow your money for the future and get a higher rate of return on your long-term savings, you can invest that money in a diversified portfolio of majority stocks and some bonds through a mid-term retirement account. work such as a 401(k) or Individual Retirement Account. While the S&P 500 or the broader stock market isn’t performing as well as I bonds at the moment, stock market gains have been better in previous decades. And although I bonds are yielding attractively now due to the rate of inflation, eventually the economy will calm down, and so will I bond yields.
  • You have precarious income and need cash: Whether you’re worried about a possible recession and possibly being laid off or planning to quit before you find your next job, having savings to cover at least a few months of unemployment over the next 12-18 months can be essential. to stay financially afloat. While a high rate of return on your money is always ideal, the most immediate priority for someone worried about income security is a bank account that offers liquidity and easy access. In this case, an I bond doesn’t really make sense because you wouldn’t be able to get your money in the first year. Instead, consider an account with branches or ATMs near your home or a digital bank that offers easy and fast money transfers, including a high-yield savings account.

In summary: Whether an I obligation is worth it is a personal question. Earning a high rate of return is great, but it’s important to consider the trade-offs that come with the 12-month holding restriction or not investing those savings for your retirement.