There’s a wealth of investment products on the market for people to invest in. Regardless of your preference, education, or financial limitations there’s something out there for everyone who is willing to pay. The best advantage of the open market is how accessible most assets are and the wealth of information available to investors. So, I decided to add I Bonds to my portfolio this year. These are government issued bonds that can be easily purchased using the treasury direct website. So, here’s why I’m Buying I Bonds.
What Are I Bonds?
Series I Savings Bonds (I Bonds) are debt securities issued by the U.S. federal government. By purchasing I Bonds you’re lending the government money in exchange for fixed semiannual interest payments. I Bonds are unique in that their interest rate is a combination of a fixed rate and an inflation rate. The latter is adjusted twice annually for inflation. Therefore, I Bonds are inflation protected investment securities. When buying I Bonds keep in mind that you can only redeem them after 1 year of purchase. If you redeem them before 5 years, there is a penalty of forfeiting the previous 3 months interest. [Click here to find out more about treasury bonds].
Why I’m Buying I Bonds
I Bonds are one of the best inflation protection assets on the market. As of the year ended May 2022 the U.S. inflation rate was 8.5%. This is the largest 12 month increase since December 1981 and there are predictions of rates going even higher. To protect my money from any further devaluation caused by inflation, I bought I Bonds. As stated before, the interest rate on these bonds is a combination of a fixed rate at issuance and an inflation rate that is adjusted twice annually. Therefore, when inflation goes up, so does the interest rate on the I Bonds.
In all my years of investing I never followed the 70/30 rule. This rule says that the ideal investment portfolio is made up of 70% stocks (or a variety of other capital assets) and 30% bonds. As I have gotten older however, I now see the value of having bonds in my portfolio to increase diversity. A well-diversified portfolio can shelter investors from the short-term volatility of the stock markets. Not only that, but I have now included passive income in my total returns. So, regardless of what is happening in the stock market, I have guaranteed passive income from my I Bond holdings.
I Bonds are very affordable. Unlike other bonds that require a minimum purchase of $1,000, you can purchase I Bonds for as little as $25. If you can spare $25 a month to purchase an I Bond, then you would have a $300 investment at the end of the year. The caveat to this, however, is a person can only purchase $10,000 each calendar year.
Another reason why I’m buying I Bonds is the tax benefits. The interest from I Bonds are subjected to federal tax but not state tax. Additionally, interest received can be excluded from taxes if it is used for educational purposes. I Bonds are also great for tax planning as you can defer taxes year after year. Yes, you read that right! You have the option to either report your interest in the same year that they are received or defer reporting interest until you redeem the bond or relinquish rights to it. Therefore, I Bonds are great for tax planning.
Learn More About Taxes Here [What You Need To Know About Taxes]
Safety (backed by the U.S. government)
I Bonds are backed by the full faith in credit of the U.S. government. They are regarded as the safest investment on the market. This is because the U.S. has never defaulted on a loan and has one of the highest credit ratings. This means that if you lend the U.S. government money, you will get your money back plus interest.
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