How Do Series I Savings Bonds Work?
Inflation is an unavoidable part of life and is something we can all plan for—sometimes decades in advance. Welcome to part one of our new four-part inflation series where we're going to address how to get a head start on inflation so you don’t feel its effect as strongly in the future.
Investing money instead of leaving it sitting in a savings account helps you hedge against inflation. Normally investing comes with risks, but not investing your savings leads to missed growth opportunities and over time the true value of your savings can decrease.
One option you have for investing your savings without having any market risk is to buy a Series I savings bond. Keep reading for more insight into how these bonds work and why they can be a good way to protect your savings from inflation.
What is a Series I Savings Bond?
A Series I savings bond (also known as a Series I bond) is a unique type of bond specifically designed to avoid the loss of purchasing power due to inflation. The way a Series I bond works is that is pays interest based on two components:
A fixed rate of return
A semi-annual variable rate that changes with fluctuations in inflation as measured by the consumer price index
When someone buys a Series I bond they pay the full face value of the bond. Let’s say they want to acquire a $10,000 face-value I bond. Then they will pay $10,000.
The way this specific bond type earns interest is that interest is earned starting on the first day of each month. Then the interest is compounded semi-annually based upon the issue date of the specific I bond.
Once you cash the bond (aka “redeem” it), you will not only get the initial money back that you paid, you will also gain access to all the interest earned during the bond term. Interest continues to accrue as long as you don’t redeem the bond. You have to redeem the bond within 30 years after the date of issue. Because a Series I bond is intended to be a long-term investment, you can’t redeem them for at least 12 months and if you choose to redeem it before the five-year anniversary of the purchase date, you’ll face a penalty and will have to pay the equivalent of the last three months of earned interest.
You have to be either a U.S. citizen, a civilian employee of the U.S., or a U.S. resident to buy a Series I savings bond.
Is a Series I Savings Bond a Risky Investment?
The great thing about Series I bonds is that they don’t pose a risk to the investor. In fact, a Series I savings bond is one of the few investments that the U.S. government guarantees. Because of the unique structure of this bond, if inflation increases then you earn more interest thanks to the inflation adjustment component of the bond. If the economy takes a dip and enters a period of deflation, you may not earn interest but the savings bond won’t be allowed to go below 0% interest per year—so you won’t lose any money even if you aren’t earning any extra money.