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- Free Money: Series I Bonds
Welcome to Rebel Markets Newsletter by Gannon Breslin. If you haven’t subscribed, please join to learn more about investing, business, personal finance, and all things that involve money alongside 5,234+ other subscribers.
Goooooooodmorning,
Before you click out this newsletter will be covering how you can lock in a "guaranteed" 9.62% return over the next 6 months with government-backed Series I bonds.
Thank you for tuning into my finance, tech, web3, all things money, etc. newsletter. Posting again so soon? I know I'm on a roll, get used to it because my writer's block has been momentarily cured. Today's a newsletter in which I will be using a word that I don't think I have EVER used before on Twitter, this newsletter, podcast, or any social media format...
The word: "guaranteed"
In finance, the word "guaranteed" is extremely taboo, and for good reason. Over the past hundred years of investing, millions of people have been scammed out of billions over the use of that single word. If you ever hear anyone say "invest in _______ and you will get a guaranteed return of _______" you should run and never look back. During the months of studying every day to get my series license, I remember the principle of "never say the word guaranteed" being loudly plastered in every single chapter of the study book.
Why never say guaranteed?
The long story short answer: There is no such thing as a guarantee in ANY and ALL types of investments.
Levels of Guaranteed Investments
Now that we understand that there is no such thing as a guaranteed return that doesn't mean there isn't a spectrum of risk amongst different types of investments that ranges from extremely safe to gambling. For example, Standard And Poor's system of ranking bonds uses AAA to identify the highest rating of a bond. AAA is a rating that is seen as a very strong investment grade, meaning that there is an extremely high likelihood that your bond will be repaid with interest. Compare this with a BB rating which is a much more speculative investment grade bond and the payee of the bond faces a considerable amount of uncertainties. Like anything in life, more risk = more reward. You probably guessed it but the interest paid on the BB-rated bond is much higher in comparison to the interest paid on the AAA bond. You gotta risk it for the biscuit!
Below are some different risk assessments amongst various types of investments/strategies:
Series I Bonds đź’°
When it comes to the risk spectrum, Series I bonds are on the farthest left "safe" side of the spectrum. Series I bonds are backed by the U.S. government and when it comes to risk it's about the same risk as you put money into your savings account with Chase Bank. Other types of investments in this category are bank CDs, money market funds, treasury bills, TIPS, etc. Full list of extremely low-risk investments here. You probably noticed that all those investments are backed directly by the U.S. government or through FDIC/SPIC measures. Essentially for this type of investment to fail the entire U.S. itself would have to crumble and money itself wouldn't matter because an asteroid hit the earth and people are building forts in the local Costco. Some real day after tomorrow type sh*t. Anyways, now I'm going to get to the meat of this newsletter.
What is a Series I Savings Bond?
Series I Savings bonds or simply called “I Bonds” are bonds issued by the U.S. government. A Series I savings bond is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.
What is the current rate?
The current rate is 9.62% through October 2022. A new rate will be set 6 months from that point based on where inflation is. Inflation is currently 8.3% but with the fed hiking interest rates it will likely (hopefully) be lower in the coming year. This of course would likely make the next current Series I bond rate lower.
What does this mean?
If you purchase a Series I bond from the government before the end of October you have a 6-month fixed interest rate of 9.62% (with no downside risk besides the entire U.S. government crumbling). Interest is paid at redemption.
How many bonds can I buy?
You can only purchase $10,000 per individual.
How long do I have to hold the bond for before I can cash out?
You can not cash out before1 one year. If you cash out anytime between 1-5 years you’re “penalized” with a forfeiture of the last 3 months of interest payments. If you cash out after 5 years there is no penalty. You can hold this bond for up to 30 years.
What could this investment look like?
You buy $10,000 worth of I Bonds. First 6 months you are locked in at 9.62%. If inflation cools off (unlikely in my mind) that rate might lower. Let’s say it lowers to 8% for the last 6 months of the year. For the first 6 months of holding the I Bond you received $481 in interest ((10,000x.0962)/2) and for the following 6 months at 8% interest, you received $200 ((10,000x.08)/2 = $400. $400/2 = $200. This example is including taking out the 3-month deduction penalty. So after one year if you sell you received $681 in interest payments or a "guaranteed" 6.81% return. Not too bad considering your money is losing around -8.3% sitting in your savings account due to inflation and God knows what you are losing in the stock market.
NOTE: There is no way of knowing what the second 6-month period rate will be officially set at. 8% was just used as an example for convenience's sake. Also, you don't have to sell after one year if you feel like the market isn't healthy, you can keep your money in these bonds for up to 30 years if you want to. Lastly, let's not forget that if inflation increases we could see the rate on these bonds go even higher than 9.62%!
Who benefits from this investment the most?
This type of investment benefits people who have cash just sitting in their bank account and have no idea what to do with it. If you have a spouse/husband that's $20,000 total that could be invested in Series I bonds.
Are these bonds taxed?
These bonds are exempt from state tax but there are still subject to federal income tax, estate, and inheritance taxes that may apply.
If you need additional help on how to buy these bonds please refer to this video below
As always, this is not financial advice and I know nothing.
Before I leave I want to live you with a thought. The market is tough and largely it is being controlled by what the fed does and says. Control what you can control: budgeting and saving your money are crucial during this time. Be smart, be patient, and get ready to back up the truck when the time is right. Millionaires are made during recessions.
Have a great rest of your day,