I’m never really certain.

Back in 2005 I started making monthly I-Bond purchases, you know, under the impression that I was making a low risk but profitable financial move.

The routine lasted for over two years before I realized that the returns were terrible.

Now, though, I look at the little bit that I still have stashed there and it’s currently earning 3 to 4 times as much as the much larger pile of money that I have tucked away in an ING savings account.

So now, 4 years after the fact, they’re looking like a great investment. It’s almost a shame that I have so little in there…

So, this morning, I find myself with an extra $350 burning a hole in my pocket (a pleasant occurrance — due entirely to an increased effort to cut my spending — Thanks DD!) and I think I’ve decided that I-Bonds are the place to go…

Sure, the fixed rate for anything I purchase before April 30 is only 0.7%currently half that of ING — but with the wacky variable rate that the government resets twice per year added to the equation, the rate is actually 5.64% for, at the minimum, the next 6 months. Read about it here.

The only downsides, that I’m aware of, are that I can’t get at the money for at least one year and if I cash out before the 5-year mark, I lose a couple of months worth of interest as a penalty.

Thing is, we’re only talking about $350 here.

Let’s be realistic… I can certainly survive a year without it and if I cash out before the 5-year mark, well, the lost interest is negligible.

And do you wanna know what’s really sad?

The biggest reason I’ve leaning this route this so that my I-Bond balance is 4-figures in the next net worth update, you know, to make that row look a little bit meatier…

And I can honestly admit to the fact that I’m utterly confused as to how the interest rates are calculated — even having “invested” in them for nearly 5 years now…

I figure that it’s better that I do this with the money instead, I dunno, of going hunting for something silly (yet expensive) on eBay…

The alternate plan tossed around (very briefly) was to buy some Ford and General Electric stock but I just don’t feel like $350 is enough to even bother with — especially with the associated fees involved…

I think I’ll just wait until I have $1k burning a hole in my pocket for that sort of thing…

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Pants in a Can Factoid:
An I-Bond is an inflation-indexed savings bond available for purchase from the US Treasury Department.

They have a fixed rate of return plus an inflation premium. The fixed rate and the inflation premium are adjusted every May and November by the Treasury Department but the fixed rate assigned when you buy the bond is good for as long as you hold it.

In my case, the .7% will be fixed for as long as I keep it. The inflation premium rate, however, will reset next month but I will continue to receive the initial inflation premium for the next six months and then it will reset to the rate that is to be determined next month. (See — this is the part where it gets kinda messy.)

The inflation premium, in theory, ensures that you don’t lose the purchasing power of your investment over time.

Still not making sense? Click here for all of the details!

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4 COMMENTS

  1. I-Bonds should be very interested 5/1/09. The formula used to determine the variable inflation rate, based on CPI(U) not seasonally adjusted, is going to give us a variable rate of around -5.5%

    If in fact, if there’s a floor of 0% on the net interest rate you’ll get a fixed interest rate of about 5.5% good for 30 years. If you add to the 5.5% the average variable rate of 2.8% you’ll get what I predict to be a 8.3% average interest rate over the next 30 years.

    Previously, the highest fixed rate for I-bonds was in the low 3s. The tough thing that all of us have to do this May is give in and buy I-Bonds if their interest rate is 0 to 1% with the understanding that we’re getting that fabulous fixed interest rate for 30 years.

  2. I am a HUGE fan of I bonds and have been for a long while. This is interesting territory for people like me because the fixed rate will likely be low on 5/1 and the variable rate will be zero barring something crazy. As a result, the short-term looks unpleasant for I bond purchasers.

    However, I have used and recommended I bonds for emergency funds ONLY. Considering they adjust based on inflation and look good during periods of deflation, you can’t beat them for this purpose over the long-term. There are a number of benefits to I bonds over bank and brokerage offerings in the cash equivalent space:

    1. Better Credit Quality – backed directly by the government and not a private corporation (FDIC/FCUA/FSLIC/SIPC)
    2. Honest Returns – instead of a bank jerking around the interest rates, they are pegged to inflation plus the fixed rate when you signed up. This eliminates the possibility of falling victim to sleeping dog syndrome…you know, when the bank starts you with a great rate and once you’ve stopped reading the statements they drop the rate until you wake up…I hate that game.
    3. Purpose Aligned – they are great for cash reserves since they are guaranteed by the government and keep up with inflation over the long-term making the product fit the purpose…keep it safe, keep me even with inflation

    For your $350 this go around, I’d argue that you’d be better off putting it into a Roth IRA with a 3x bull ETF for the next three to five years, but if you want to pile up cash, I like I bonds even if they’re going to be a bit of a bummer over the near term.

  3. Thanks for the great comments guys — I’m already feeling more confident in my decision.

    I’ve done a bit more research today, after the fact, and I’m thinking that I just might toss a bit more money the Treasury’s way before month’s end…

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