I Bonds Demystified; Get Good Returns On Your Cash

By in Bond, Investing, Money Management, Retirement, Saving | 12 comments

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?

Protect your funds from inflation

Protect your funds from inflation


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.


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?

image credit; google images_jagshare


  1. Part of my asset allocation is in TIPS. It has performed pretty well in the last couple of years.


    January 15, 2013

  2. @Krantc-I have a TIPS fund as well. The important point to remember is that when interest rates increase, all bond funds will decline in value. I’m keeping my eye on the TIPS fund.

    Barbara Friedberg

    January 15, 2013

  3. Great post and a very under used asset class I believe as well! Inflation is a real thing and if you don’t manage it – you are definitely going to cost your self some money in the future. There may be a place for a some cash in the overall financial picture but even as Krantcents pointed out TIPS are great, these bonds are great, anything to give you a little edge and if you really needed more liquidity they are backed by the US Gov’t and there will always be a market for them 🙂

    Nunzio Bruno

    January 15, 2013

  4. Very well put Barb. Currently most of our cash is in some MMMF’s, but I have been looking at a TIPS fund. I am really leery of doing anything long term with bonds right now, so am sticking to looking at mid term or shorter funds.

    John S @ Frugal Rules

    January 16, 2013

  5. I’m a huge i-bond fan! What a great all-weather investment. For long term investors I’m not so keen if you have any risk tolerance, but definitely for conservative investors OR shorter term needs, this is a big winner.


    January 16, 2013

  6. Wow! Neither of my advisors has ever recommended I Bonds, but they sound like an investment to check out. I love the idea that they’re adjusted for inflation – and no commission fees! Thanks for an eye-opening article, Barb.

    Eliza at Happy Simple Living

    January 17, 2013

  7. @John, I would wait on the TIPS fund. Since interest rates are at historical lows, when they rise, the principal value of the TIPS fund will fall. If you decide to go with the TIPS fund, go in gradually and invest a small amount over time (dollar cost average)to average out your purchase price.
    @Average Joe, they are also great for the “cash” part of one’s portfolio.
    @Eliza, So happy to introduce you to this great cash alternative. One point to remember is that you do need to keep the funds invested for a minimum of one year.


    January 17, 2013

  8. I love the concept of I Bonds–I definitely need to look into them again (I was given bonds when I was little and used them to finance part of my college tuition).

    The Happy Homeowner

    January 17, 2013

  9. Good idea, the inflation-protected bonds. We don’t have these in the UK AFAIK – recently our inflation has been quite higher (currently 2.7% CPI) which would be way better than the bank will offer you! I presume you can’t buy these from overseas…..


    January 17, 2013

    • @John, That’s an interesting question regarding buying US Treasury I bonds from the UK. I checked around a bit, and I believe foreigners can buy US treasury securities. Although your return would be pegged to the US rate of inflation, and you would also be subject to currency fluctuations. It’s an interesting thought. You might want to check out a mutual fund who also hedges currency against the pound. Email me if you want to talk about ideas:)
      @Happy-I bonds are relatively new and a great place to invest the cash portion of your portfolio. Very easy to invest as well, all electronic at treasury direct.gov.


      January 18, 2013

  10. Thanks for this. I’ve read about I-bonds several times and seem to forget about them, probably because no one is talking about them.


    January 20, 2013

  11. @Kim-They are the best cash alternative available today!! Hands down!!! (For any funds you can keep invested for one year).


    January 20, 2013


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