I Bonds Won’t Make You Rich

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I’ve been receiving a lot of positive feedback from folks about my articles on I Bonds. I am delighted something I wrote has helped people! However, let’s take a step back and review because I Bonds won’t make you rich.

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I don’t think I’ve gone a day in the last 5 months without seeing or hearing a post, news article, TikTok or podcast talking up I Bonds, which are sold by the US Treasury. People are scheming of ways to get around the $10,000 per social security limit. I even got in on it and wrote a few articles on these bonds: Series I Savings Bonds and your Emergency Fund & Series I Bonds and a 9.62% Interest Rate. No doubt, Series I Bonds are an awesome product provided and backed by the United States Federal Government.

If you have emergency fund money or money you’ll need soon-ish and it can’t drop in value, it’s a great place to park some of that cash. However, dare I say it, I Bonds won’t make you rich. Maybe a tiny bit more, but that’s it. They are meant to preserve cash’s value against inflation. Hear me out.

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Yes, I am a Champion of the Series I Bond

I Bonds are a perfect safe haven for cash

I wrote an article on how you should put your emergency fund money into I Bonds. Why? Emergency funds are meant to be liquid access to cash in case of an emergency. However, there’s a big problem holding cash. Inflation. The problem with cash or keeping it in a checking or savings account is the paltry interest rate (if any) it pays. When you keep your savings in one of these accounts, its power will erode with inflation. The beauty of I Bonds is that these products will protect cash from inflation.

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I Bonds will pay a fixed rate and the going rate of inflation. Plus, the bonds will pay compound interest after every 6 months. You do have to hold I Bonds for at least 1 year and there’s a claw back penalty of 3 month’s interest if you cash out before 5 years.

Investing in stocks will provide more growth.

Although I Bonds are a great alternative to savings and checking accounts, it’s not a good alternative to investing in the stock market. I Bonds are meant to protect your money, not to grow it. It’s hard to accept that line of thinking when these bonds are offering a 9.62% interest rate as of this writing, but it’s true.

I Bonds are very popular right not because of the historic rates they’re currently offering. You didn’t hear much about I Bonds 5 years ago because the interest rate they offered wasn’t great. Rates on I Bonds are high right now because inflation is very high.

Money you can’t afford to lose.

Emergency fund money is meant to keep your basic expenses paid when a surprise cost comes up or an income stream you count on runs dry. We, the Moneyaires, keep a fairly large emergency fund. This is because Mr. Moneyaire provides our main source of income and we’re landlords. We have to be able to replace appliances and make repairs at our units as well as float vacant ones at the same time. Plus, float our own household expenses if Mr. Moneyaire were to lose his job. In a worse case scenario; dealing with multiple issues at multiple properties and being freshly laid off. The thing of nightmares. This is why, however, we keep a large emergency fund.

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And there are other circumstances. Perhaps you have a kid about to attend college or trade school. Maybe, you’re nearly there with a down payment on a new home. You can’t risk a downturn in the market that might happen, even if it only lasts a few years. You also don’t want the power of your money to erode to inflation. This is when I Bonds are an excellent choice.

Don’t Buy I Bonds at the Expense of Investing

With a current 9.62% interest rate, a lot of money has been flocking to I Bonds. According to Bloomberg.com record investments have been made in I Bonds to the tune of $1.3 Billion in November of 2021, $2.78 Billion in December 2021 and $3.3 Billion in January 2022.

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And it makes sense why. War rages in Ukraine. Climate change is wreaking havoc. Inflation is at the highest point in 40 years and everyone is predicting a recession (some say we’re already in one). The stock market has been tanking and people are afraid that if they put their money into the market now, it’ll evaporate. I Bonds not only protect your capital but provide current holders a very high rate of return, 9.62%!

People are finding all sorts of creative ways to invest more than the $10k per social security by buying bonds for trusts, their children, through their companies and tax refunds. In times of market uncertainty, I Bonds are offering a guaranteed thing. This is perfect for some of your money.

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So wait, if the market is tanking, shouldn’t we buy I Bonds?

Well, remember that old adage from Warren Buffet to “Be greedy when others are fearful and fearful when others are greedy?” It’s time to be greedy because there’s a lot of fear. Big profitable companies have gotten beaten up. Stock prices may even go down further. It’s time to start buying those cheap stocks.

Don’t divert money away from investing into the stock market towards I Bonds. Please do not sell your equity shares to buy I Bonds. Do dollar cost average into the market. Buy into low cost broad market funds like IVV, VTI and VTSAX. For those with more appetite for risk, consider investing into heavily beaten up tech companies like Amazon (AMZN), Salesforce (CRM), Atlassian (TEAM), Disney (DIS) and Microsoft (MSFT). Full disclosure, we hold shares of these companies.

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These companies have been heavily beaten up as of late. Why? Because inflation is high and interest rate are going up. Tech companies don’t have access to the free flowing capital they once had to make investments to grow their business. There’s also a chip shortage meaning many companies like Apple have to scale back and are earning less. Also, their clients/customers feel the pinch and buy less. These companies report less then stellar earnings which pushes their share prices down, which pushes the market down and everyone freaks out. Fear breeds fear.

Preservation vs. Profit

Before you go buying I Bonds on behalf of you, a trust, your company, etc. realize that these bonds are meant to preserve the value of your money. I Bonds won’t make you rich, it’s just helping you to keep up with inflation. It won’t help you reap the gains the stock market, real estate investments or reinvesting into your own business may.

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An I Bond is a tool the government offers savers so their dollars keep their power. For example, let’s say a widget today costs $1. Inflation is running at about 10% a year. In a year it will cost $1.10 to buy that same widget. I Bonds take into account what inflation is and returns that to the bond holder so in a year you won’t feel the sting of inflation when you purchase that widget at the higher price.

If you invested $10,000 into I Bonds in 2012 as of May 2022 you’d have $12,911. Not bad. Now, compare that to a $10,000 investment in a broad low cost index fund like IVV. During that same time your money would be worth $35,446.

The gains from taking on more risk in the market out-weigh the guaranteed returns of I Bonds long term.
The high interest rates I Bonds currently offer won’t last long.

You’re talking Crazy

I know this seems like ridiculous advice, to buy into the US stock market when there’s a war raging in Ukraine, gas prices are through the roof, inflation is high, a recession is looming (or already here) and COVID is going back up and oh yeah, monkey pox. WTF.

But right now the stock market is on sale. It seems super risky right now to invest, but not investing right now is even riskier! Not investing now means you’re going to miss the rise in stock market value if you keep your money sidelined. Keeping your investment money in I Bonds is sidelining it. The only way to ride the market up is to get invested when its down. During downturns we, the Moneyaires, have put more money into the market and we’ve always come out ahead. Way ahead.

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Don’t lose sleep over not being able to put more money into I Bonds. Don’t divert money away from investments in real estate, the stock market or your business to buy more in I Bonds. I Bonds are an excellent place to stash cash that would otherwise be withering away in a savings account only earning you 0.2% interest. I’m not saying you should not buy I Bonds. You should – but not at the expense of investing into the stock market. If you’re not investing into the stock market right now, you’re handicapping your future earnings.

It’s a rollercoaster

The stock market has been super volatile as of late. Some days we’re way up, and the following day we’re way down. In a scary way. And that’s okay. The stock market has always been volatile. It’s probably going to lose more value before it really starts picking up again. Recessions on average last about 75 weeks or about a year and a half. People lose their jobs in recessions, and layoffs in the tech sector have started. If you’re worried about losing your job, its wise to shore up that emergency fund so it can float you through until your next start date. However, be aware that money needs to season as an I Bond for a full year before it can be accessed.

I Bonds Won’t Make You Rich

So, I Bonds are an excellent substitute for a savings account. But please don’t think they are an excellent substitute for investing into the stock market. You’re most likely not going to save your way into wealth. To become wealthy you need to get your savings invested into the stock market (or real estate or your own business) and have that money start making money for you.

Cheers!

Mrs. Moneyaire

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