I Bonds Demystified; Get Good Returns On Your Cash
You’ve heard the rhetoric. If you’re young, invest in stocks. They have the greatest possibility of growing your money long term. Historically, stocks returned somewhere between 7 and 9 percent annually over the past ninety years or so. Actually, I consistently recommend investing in diversified stock index funds for investors. So why am I suggesting that stocks might not be the only way to go?
INFLATION CAN DESTROY YOUR CASH
Government I (inflation protected) bonds are a little known investment which protects your money from the ravages of inflation. I shared the following example with my university Investments class last week and they were stunned.
If you bought something for $100 in 1981. Do you know how much that exact item would cost in today’s dollars? $243.59
Flip it around and a $100 item purchased today could be picked up for $38.30 in 1981.
Over the most recent 30 year period, your purchasing power eroded by over 60 percent due to inflation.
There is an investment, which is guaranteed by the U.S. government to protect your purchasing power from inflation. There is no commission fee to purchase this investment and the interest rate corresponds with the inflation rate.
I BONDS DON’T GET ENOUGH PRESS
If you are saving today, for a home down payment in a year or retirement in 40 years, Treasury I Bonds deserve a place in your portfolio.
For as little as $25 you get an investment which protects cash and purchasing power from inflation. At treasurydirect.gov, you can buy I bonds in any amount from $25 up to $10,000. Every six months, your return (interest payment) is adjusted for inflation. If inflation goes to 3 percent, your return will adjust to an annualized return equivalent to 3 percent. And when interest rates rise a bit, you receive interest on the purchase of new bonds, in addition to the promise of bi-annual inflation adjusted interest payments. There are two ways to make money on these investments; an interest rate set at purchase (currently 0%) and twice yearly interest payments determined by the inflation rate.
The only drawback to these savings vehicles is that you’re limited to purchasing $10,000 I bonds annually per social security number. There’s a workaround by receiving $5,000 of your tax refund in I bonds which brings your total annual investment up to $15,000. For most investors, this limitation isn’t much of a problem.
With a final maturity of 30 years, I bonds are designed as a long term investment. But, those who need the cash sooner can cash in their I bonds in any time after 1 year without penalty.
Since these bonds are purchased electronically from the government treasury direct website, financial advisors have no motivation to promote these cash substitutes. That is why I bonds get very little press.
For those who don’t like any volatility in their investment portfolios or who want their cash to hold it’s value, I bonds are the perfect investment. Check out I bonds for the cash part of your investment portfolio, emergency fund, and any cash savings. The returns are tough to beat in this low interest rate environment.
Get a notebook and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
1. Read about Treasury I bonds in depth
2. Open your Treasury Direct.com account
3. If you want to protect your cash from inflation, consider purchasing I Bonds. Remember, you can start investing with as little as $25.
Caveat; This is a not a personal investment recommendation. For investing questions, consult your own personal investment professional.
Where do you keep your cash investments; bank savings account, money market mutual fund or under the mattress? Have you purchased Treasury I Bonds?
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