Don’t Let Inflation Eat Your Savings. I Bonds May Soon Pay You 9.6%

Piggy bank with US dollar bills sticking out

I bonds offer a good way to grow your savings right now.

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Ash inflation continues to climb and eat into our budgets, there’s a compelling case to park your cash in Series I Savings Bonds instead of a regular savings account. I bonds, which have been touted as an inflation-safe savings strategy, are expected to see interest rates up to 9.6% next month, according to the Wall Street Journal and recent calculations from the Consumer Price Index.

Must savings accounts earn near 0% in interest, which is easily outpaced by the current 8.5% inflation rate† As inflation goes up, your dollar loses its value, which means the money in your savings account doesn’t stretch as far† Federally backed I bonds, which often have higher interest rates during periods of high inflation, may be one solution to protecting your savings from getting eaten up by inflation

Are I bonds the right move for growing your savings? Here’s what you need to know.

Here’s how inflation is affecting your savings

The current 8.5% inflation rate is an average across goods and services; some areas of spending may be experiencing even higher price increases. Meats, poultry and fish, for example, are currently 13.7% more expensive than a year ago. For reference, 2% inflation per year is considered healthy for the economy.

Meanwhile, the average interest rate for a savings account is 0.06%. While you normally lose a little bit of value each year to the “normal” inflation rate, the trade-off is that a savings account is low risk (compared to the stock market) and easily accessible (compared to a bond or CD). But with the inflation rate exceptionally high right now, you may be better off diverting savings you won’t need immediate access to in a low-risk vehicle with better yield.

This is where I bonds come in.

How I bond interest works

The interest rate of I bonds is a combination of two rates: a fixed rate and a derivative inflation rate. The fixed rate is set by the US Treasury, which is the federal agency that issues the bonds. While the fixed rate dictated by the US Treasury may change every six months, I bonds maintain the fixed rate they were issued under for their lifetime (up to 30 years). Currently, the fixed rate for I bonds is 0%.

The derivative inflation rate has also been adjusted twice a year. This data comes from the Bureau of Labor Statistics, which publishes Consumer Price Index data every month. The US Treasury applies a formula to this data and the fixed rate to calculate the total interest rate on I bonds. I bond interest rates are updated on the first business days of May and November.

Right now, the combined interest rate on I bonds sits at 7.12% — which is well above most savings account rates. And, with inflation hitting a new 40-year high last month, the inflation rate for I bonds is expected to rise as high as 9.6% when I bond inflation rates are adjusted in May.

Are there drawbacks to I bonds?

Yes. There are two major catches. First, you can only buy up to $10,000 in I bonds. But, if you’ve yet to file your tax return, you can also opt to receive up to $5,000 of your refund as an I bond — bringing the total you can purchase up to $15,000. This cap may limit the usefulness of I bonds on preserving the value of your savings.

Secondly, your money will also be locked for a year, meaning you can’t draw on these funds if needed until you hit the one-year mark. But there’s an incentive to not touch your I bond for even longer: This savings strategy works best if you don’t cash in your I bond before five years. Withdrawing your money before five years’ time comes with a penalty — you’ll lose the last three months of interest on the bond. You only get paid the full interest rate if you keep the bond for at least 5 years.

Lastly, while I bonds are considered safer investments, due to being backed by the government, you should know that no investment is risk-free.

If you want to buy an I bond, you can do so directly from the US Treasury website at TreasuryDirect.gov.

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