I-Bonds are the rage
“The two most powerful forces in the universe are gravity and compound interest”
Inflation is no joke, but I think many people don’t really understand just how bad it is. The last 2 years have seen 7-8% inflation – levels not seen since 1981. People under 40 have never experienced conditions like we have today and may be shocked how dramatic inflation and interest rates can change whole purchasing and business models. At 8% inflation, the value of your money, the real purchasing power, drops in HALF every 8 years. It’s like having $100 today, and without doing anything, it’s only worth $50 in 8 years. Unless you are getting an 8% raise EACH YEAR, you’re not even breaking even.
I think a lot of people think that prices will ‘go back to normal after this is over’. With inflation on a scale like today, prices almost certainly will NEVER go back. Besides specific market-driven increases (like the war in Ukraine on gas prices or local shortages) the prices you are seeing today are what they will be from now on. Forever. And they’ll keep going up each year by the inflation rate. That’s how the $100 you have today will be buying less tomorrow. You still have the $100 that can buy you 10 boxes of cereal at $10 today – but it can only 5 boxes in 8 years when cereal is $20/box after 8% inflation for 8 years.
So, how do I beat inflation?
So what can you do? In order to break even, your money needs to work for you – and work hard. You need to be making 8% or more on every penny you have in order to keep up with the rising costs. But where can you find 8% and higher returns?
Traditionally, you look to the stock market, but in 2022, that’s turned out to be a really bad rate of return. Many of the most profitable tech stocks are down 25-40% this year: nVidia, Netflix, Amazon, Google, etc. The Nasdaq, S&P, and Dow Jones index are all down so far this year.
Another traditional store of value in downturns like this is gold and precious metals. But despite being a refuge during the initial market downturn in late February, they have also been declining ever since. Bitcoin and crypto currencies – even so-called stable coins – have seen even bigger routs. Bitcoin is down over 55% for the year, and numerous alt-coins and even stable coins have collapsed completely to zero.
Bonds have been largely a terrible place to put money in the last decade. Very low inflation and interest rates means you were getting almost nothing from them. Many young people probably don’t even know about bond investments. However, in 2022, even bond funds took big hits and are in negative territory.
It seems there is nowhere to go. Putting your money in stocks and bonds that give NEGATIVE growth on top the 8% inflation means you could be losing 30-50% of your money in one year alone.
I-Bonds to the rescue?
But there is another kind of bond – Series I Bonds – and they are really hot right now. These bonds, sold by the US government, are tied to the inflation index and return a value that keeps you at least even with current inflation. In the current quarter, they are returning over 9% – which is better than just about every other investment you can safely make. You may not be getting ahead of inflation, but you certainly are guaranteed to keep up with it. This is especially attractive in a time when almost all other investment vehicles (stocks, bonds) are going down.
There are, however, some important things to know about these bonds:
- They must be purchased directly from the US Treasury website – which unfortunately has a pretty terrible 90’s era website.
- Earnings are exempt from state and local income tax.
- I-Bonds earn interest for up to 30 years. You must cannot sell them for a minimum of one year. But if you cash them before five years, you lose the previous three months of interest.
- The return rate is not fixed, it is reset twice a year based on the current inflation rate on May 1st and Nov 1st.
- Maximum purchase of $10,000 per year – sort of. Ways to work around it below!
Important hacks you can use. See link at the bottom for complete details:
- If you have a trust in your name, the trust can purchase an additional $10,000 per year (total of $20,000). See the link below for complete details.
- You can also use your tax refund to purchase up to $5000 more per year (Hack: could you make tax pre-payments to ensure you’re over that $5000 refund value on purpose)
- Couples filing separately can do both of these as well – doubling the amount.
If you are interested in purchasing some I-bonds, check this guide out since it walks you through the process on treasurydirect.gov and – the only place you can purchase them.