There has been a lot of talk lately regarding investing in I Bonds while inflation is high. They seem to be a great investment at this time, but you should know all the facts.

The first question you may have, what is an I Bond.  It is a Series I Savings Bond issues by the US Treasury, that earns interest based on combining a fixed rate and an inflation rate.  How is the rate calculated?  It is a combination of the fixed rate, which is currently 0% and the semiannual CPI U (the consumer price index for all urban consumers, includes gas and food) which is currently 4.81%.  The actual calculation is the Composite rate = [fixed rate + (2 * the semiannual inflation rate) + (fixed rate * semiannual inflation rate)].  An example of today’s rate is:

[0.00 + (2 * 0.0481) + (0.00 * 0.0481)

[0.00 + .0962 + 0.00] = 9.62%

You might say that is too good to be true.  It is true, but you need to know all aspects of the bond.  The interest rate is reset every six months from the time you purchase the bond.  The Treasury resets interest rates on the first business day of May and November and what the date is that your bond resets (every six months from the purchase date) it will use the rate which has been set by the Treasury.  Keep in mind inflation may not be here forever, and there may even be times of deflation.  The I Bond interest rate will never go below 0%.

Another item to know about is when can you redeem your I Bonds.  I Bonds will pay interest for 30 years from the date of purchase.  You can redeem them starting 12 months after the date of purchase, however, if you redeem them within the first five years you will be charged a fee consisting of the last 3 months of interest. This would not be much of a penalty if your bond was earning 0% interest.  If you were to need the money and you were earning a higher interest rate this could be costly.  You do not have to redeem the entire bond at one time, you can redeem bonds in as low as $25 increments.

Are you thinking how much and where can I purchase I Bonds?  Each individual can purchase up to $10,000 annually.  This is not a get rich quick scheme.  You cannot purchase these from a financial advisor, bank or broker.  These can only be purchased from the Treasury Department at www.treasurydirect.gov or via your federal tax refund.

I Bonds can be a great way to balance out your investment portfolio if you have some extra money floating around that you may not need for 5 years.  Remember, it is always important to know the facts before being caught up in the hype.