It’s a decision that makes sense to me.
- I bonds are a relatively safe investment.
- In times of high inflation, I bonds are a good bet.
As someone who has been investing for years, my strategy is largely to invest in stocks. Even though equities are quite risky, because I work with a long-term investment horizon, I’m comfortable taking that risk. And I know that historically stocks have generated much higher returns than safer alternatives, like bonds. Since I hope to build a good chunk of wealth for retirement, I hold a lot of stocks in my brokerage account.
But recently, I made the decision to put some of my money into another investment – I bonds. And here’s why you might want to do the same.
Why links make sense right now
I bonds are government guaranteed securities whose interest rate is tied to the rate of inflation. During times when inflation isn’t high, I bonds aren’t always the best bet, because even though they’re relatively risk-free, they won’t pay much interest.
But right now, inflation is skyrocketing. As such, I bonds are currently paying quite generously. In fact, the rate I’m currently getting on my I bonds is comparable to, if not better than, the return I’d typically earn on my equity investments. And that’s why I chose to buy $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 pour so much money into I-bonds. You can buy these bonds in increments as low as $25.
Should you buy bonds?
If you have money outside of your emergency fund that you are looking to invest, then I bonds are a good choice right now because of the generous interest rates they pay. And with I bonds, you don’t take the risk of buying stocks.
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That said, I bonds have some restrictions. You must keep these bonds for at least one year after purchasing them. And if you cash them in within five years, you’ll lose a few months’ interest as a penalty. This is an important thing to think about because right now inflation is skyrocketing. But if inflation slows, your I bonds will start paying less.
It’s a risk I’m willing to take, though. First, I expect inflation to remain rampant this year, even as the Federal Reserve aggressively raises interest rates in an effort to calm things down. Second, even if the inflation rate starts to come down to a noticeable degree, I don’t expect it to dip, 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. Do I want to collect them within five years? Maybe. But then I’ll look at the numbers to see if it makes sense to take a penalty to free up that money.
All told, I bonds are an investment worth considering right now. If you’re not sure if they’re the best bet for you, invest a small amount to get started. But for me, it’s a good way to take advantage of runaway inflation rather than be hurt by it.