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Yahoo Finance columnist Kerry Hannon joins the Live show to discuss I bonds and the best ways to grow your money despite continuing inflation.

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What to Know About Investing in I Bonds Amid Inflation

In today’s uncertain economic climate, with rising inflation rates and concerns about the erosion of purchasing power, it is wise to explore investment options that provide a measure of stability. One such option is investing in I bonds, which offer both protection against inflation and the potential for growth.

I bonds, also known as inflation-protected savings bonds, are a type of U.S. Treasury bond that are specifically designed to safeguard your investment against inflation. They are an attractive option for investors looking to preserve the value of their money in real terms.

Here are a few key things to know about investing in I bonds amid inflation:

1. Inflation Protection: The unique feature of I bonds is their built-in protection against inflation. Their interest rates are composed of two components – a fixed rate and an inflation rate. The fixed rate remains constant over the life of the bond, while the inflation rate adjusts semiannually based on changes in the Consumer Price Index for All Urban Consumers (CPI-U). This means that as inflation rises, the interest rate on the I bond will adjust upwards, thereby ensuring that your investment keeps up with the rising cost of living.

2. Interest and Earnings: I bonds pay interest based on the combined fixed and inflation rates. The interest is tax-deferred, meaning you don’t have to pay taxes on it until you redeem the bond. Additionally, you can choose to reinvest the interest, allowing your investment to grow even more over time.

3. Purchase Limits: There are certain limits to how much you can invest in I bonds. As of 2022, the annual purchase limit for individuals is $10,000 per Social Security Number. This limit applies to both electronic and paper I bonds. It is worth noting that the purchase limit is set to prevent large-scale investors from taking advantage of the inflation protection benefits.

4. Liquidity: Although I bonds have a minimum holding period of one year, they can be redeemed after 12 months with a three-month interest penalty. However, to receive the full interest accrued, they must be held for at least five years. This makes I bonds less liquid compared to other investments like stocks or mutual funds. Therefore, if you need funds in the short term, I bonds may not be the best choice.

5. Diversification: Investing in I bonds can provide a valuable diversification element to your portfolio. They are considered a safer investment, as they are backed by the full faith and credit of the U.S. government. This can help mitigate the risks associated with inflation, market volatility, and economic downturns.

In conclusion, investing in I bonds is a practical strategy to combat inflation while keeping your investments safe. Their unique design provides an effective hedge against rising prices, making them an attractive option for investors who want to preserve their purchasing power. However, it is essential to consider factors such as purchase limits, liquidity, and diversification requirements before allocating a significant portion of your portfolio to I bonds. By understanding the key aspects of investing in I bonds amid inflation, you can make informed decisions to protect and grow your wealth.