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Inflation Got You Down? I Bonds Can Help Protect Your Savings

As inflation remains high, consumers are paying more and purchasing less, with increased prices for food, gas and other necessities impacting our budgets. If you’re wondering how to make your dollar last longer — or even where to park your savings — – you might look into Series I Savings Bonds. Known as I bonds, these are relatively stable government-backed investments sold directly to the public that can track your cash alongside surging consumer costs. 

When inflation is high, your dollar loses its value, which means the money in your savings account doesn’t stretch as far. Because federally backed I bonds have higher interest rates during periods of high inflation, they are one solution to protecting your emergency budget — especially as an increasing number of economists are forecasting a recession. 

If you buy an I bond through October, it will carry an interest rate of 9.62%. For comparison, most savings accounts earn near 0% in interest, which gives you no reassurance with the current 8.6% inflation rate

Are I bonds the right move for growing your savings? Here’s what you need to know.

Here’s how inflation is affecting your savings

The current 8.6% inflation rate is an average across goods and services; some areas of spending may be experiencing even higher price increases. For reference, 2% inflation per year is considered healthy for the economy. 

Meanwhile, the average interest rate for a savings account is 0.06%. While you normally lose a little bit of value each year to the “normal” inflation rate, the tradeoff is that a savings account is low risk (compared to the stock market) and easily accessible (compared to a bond or CD). But with the inflation rate exceptionally high right now, you may be better off diverting savings you won’t need immediate access to into a low-risk vehicle with better yield. 

This is where I bonds come in.

How I bond interest works

The interest rate of I bonds is a combination of two rates: a fixed rate and a derivative inflation rate. The fixed rate is set by the US Treasury, which is the federal agency that issues the bonds. While the fixed rate dictated by the US Treasury may change every six months, I bonds maintain the fixed rate they were issued under for their lifetime (up to 30 years). Currently, the fixed rate for I bonds is 0%.

The derivative inflation rate is also adjusted twice a year. This data comes from the Bureau of Labor Statistics, which publishes Consumer Price Index data every month. The US Treasury applies a formula to this data and the fixed rate to calculate the total interest rate on I bonds. I bond interest rates are updated on the first business days of May and November.

Right now, the combined interest rate on I bonds sits at 9.62% — which is well above most savings account rates.

Are there drawbacks to I bonds?

Yes. There are two major catches. First, you can only buy up to $10,000 in I bonds. But if you’ve yet to file your tax return, you can also opt to receive up to $5,000 of your refund as an I bond — bringing the total you can purchase up to $15,000. This cap may limit the usefulness of I bonds on preserving the value of your savings.

Second, your money will also be locked for a year, meaning you can’t draw on these funds if needed until you hit the one-year mark. But there’s an incentive to not touch your I bond for even longer: This savings strategy works best if you don’t cash in your I bond before five years. Withdrawing your money before those five years are up comes with a penalty — you’ll lose the last three months of interest on the bond. You only get paid the full interest rate if you keep the bond for at least five years. 

Last, while I bonds are considered safer investments, due to being backed by the government, you should know that no investment is risk-free. 

If you want to buy an I bond, you can do so directly from the US Treasury website at TreasuryDirect.gov.

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