- Friends, family and experts have told me that now is the time to invest in I-bonds.
- They are a good choice because they are stable and secure and the rate is high at the moment.
- However, they are limited, inflexible and the variable rate worries me.
A few months ago, a friend I often went to for financial advice called me to tell me to invest in something called I Bonds.
An I-bond is a bond issued by the U.S. Treasury that pays you both a fixed interest rate and an inflation-adjusted interest rate. Currently, I Bonds yield higher returns (9.2%) than some high-performing stocks and the risk is much lower as it is a government-backed bond. Plus, the returns are much higher than other low-risk options like a high-yield savings account or CD.
After my friend warned me to take advantage of this 9.2% locked-in rate that will be available until October 2022, when the interest rate changes (it changes twice a year), other people in my life gave me the same advice, from family members to financial advisers.
But the more I researched I Bonds and looked at my own financial goals, the more I realized I didn’t want to go down this road with my money. These are the reasons why I said no to investing in I bonds, even though all my friends did.
1. There is a limit to how much you can buy
One investing mistake I have felt over the years is investing a small amount in too many different projects, stocks or funds. I want to limit the number of things I put my money into and put larger amounts in each of those assets.
So when I found out that someone can only buy $10,000 worth of I-bonds a year, plus another $5,000 with your tax refund, I just didn’t feel like it was worth it.
I found this maximum limiting. Since I don’t want to spread smaller amounts of money across multiple places, the fact that I couldn’t put more money into it every year made me stop and think about whether it was worth it for my financial plan.
2. There is a lack of flexibility
As with most bonds or CDs, the money you put in I bonds must be held there for a minimum of 12 months. Thereafter, any I-bonds redeemed in less than 5 years will be penalized with the interest earned over the last three months. The full term of an I Bond is 30 years, making this a good long-term investment that you can contribute to annually.
Since I already have a SEP IRA to which I contribute each month as my main source of long-term financial support, adding I-bonds to my portfolio didn’t seem to make sense, especially since I didn’t want to worry about having pay fines if I decide this is not the right step for me to take now.
3. The rate varies based on inflation
Since the rate of an I-bond is based on a fixed and inflation-adjusted rate, there is no guarantee that the amount of your return will remain as high as it is now in the future. As inflation falls, so does the rate of I bonds.
So while it was tempting to buy I-bonds at the current high rate of 9.2%, that rate could drop quite a bit next year and my money would be stuck in the I-bond for the next five years (otherwise I’d be fined pay to withdraw it).
The floating rate eventually made me decide to put money into I-bonds, even though so many other people I know have decided to do it.