Money Rehab with Nicole Lapin - The Inflation-Proof Investment You Need Right Now

Episode Date: June 15, 2022

With the stock market in a downward spiral, you may think all investments are lost causes— but guess again! Today, Nicole shares the inflation-proof investment you need to make... right now.  To learn more, check out: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm 

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. These are some difficult financial times, and I know it can be scary,

especially when words like recession and depression are thrown around. Frankly, I'm anticipating that the economy is going to get more precarious before it stabilizes. But this is why I'm here. This is why we have this podcast. To help you get through difficult economic times. I chose to focus my career on financial literacy in the wake of the 2008 recession because I saw financial knowledge make the biggest difference in people being able to live the lives they want without

huge amounts of disruption. During the recession, I was broke. But I was able to get myself through, in part because I sought out the financial tools to build a proverbial shelter to weather the economic storm. And if I made it through 2008, you can make it through 2022. So let's get prepared for the storm ahead. I've said it before and I'll say it again. The real way to build real wealth is to invest. But with the stock market in a free fall right now, I do recommend buying into some safer investments.

And the best safe investment you can make right now is probably the series iBond. And I know you are thinking about turning off this episode because bond talk makes you fall asleep. And can I just say, poor bonds. They get all sorts of flack. People think bonds are boring, lame, bad birthday gifts, and so on and so forth. But here's the thing. If bonds aren't the sexy investment of the moment, what is? Is it Tesla? Because at the time I'm recording this, Tesla is down 46.06% since the beginning of the year. Is it Apple? Because even Apple is down 27.54% since January. Is it Bitcoin? Hell no. Bitcoin is down 55.24% since January. You know what the current interest

rate on a Series I bond is? 9.62%. And that's 9.62% gains and not losses. So I'll ask you again, what's sexier? A 50% loss on your investment or nearly 10% in gains. Bonds are the girl next door that we need in this economy. There are many different types of bonds, which we talked about in episode 212 titled, Which Bonds Should You Bond With? We love our puns at Money Rehab. Today, I'm going to focus on just the Series I bond because it is the MVP of all bonds right now. Here's what makes the Series I bond so special. The yield is based on two different rates. One is a fixed interest rate, and that stays the same for the life of the bond. The second is based on inflation, and that is where the I in Series I bond comes from. The second rate changes every six months based on inflation, so your I

bond will stay dynamic to keep pace with inflation. Right now, the fixed interest rate for I bonds is 0%, and the semi-annual rate based on inflation is 4.81%, so annualized, you get a composite rate of 9.62%. Let's pause for a second because this is an important thing to realize. When we talk about Series I bonds, we talk about the annualized rate, but that's not what you're actually going to earn every time the interest compounds. So when you see the Series I interest rate, just know that you're going to earn half of that annualized rate on a six-month basis. Let's take the current rate as an example. The Series I annualized rate is 9.62%.

So if you were to buy a Series I bond now, you would earn half that, or 4.81%, on your investment over six months. And here's another important thing to understand. Even though you'll earn 4.81% during the six-month period, your rate may change for the next six-month period. Because again, the interest on I-bonds adjust for inflation twice a year, on May 1st and November 1st. So that annualized 9.62% interest rate can and will change.

It will go up, it will go down, depending on what inflation does. And I know this gives potential investors pause because our minds immediately go to a response like, oh, my ROI could go down? Well, screw that. That doesn't look like a good bang for my buck. And yes, the Series I ROI could be smaller in future years than it is right now, and you should understand that going in. But in my opinion, we should be prioritizing investments that protect against inflation. Inflation is a very real force right now that is rocking the economy, and analysts say it is here to stay. Plus, even if your ROI on I-bonds shrinks, the lowest it can go down to is zero. In other words, you might earn no interest, but your initial investment will still be intact. So with iBonds, you're never going to

lose your initial investment like you might if you invested in Bitcoin. Just saying. Now let's talk about the maturation timeline. Once you buy an I bond, there's no further action required from you in order to keep your investment growing. For as long as you keep the bond, your bond automatically adjusts with the new rate every six months, your interest is reflected monthly, your interest is reinvested every six months, and compound interest does its beautiful, beautiful thing. Like most bonds, you're incentivized to hold onto your investment for a while. The earliest you can cash in on your bond is after a year. You can't even think about touching your bond before the year is up.

So when you're deciding how much to put toward a series I bond, choose an amount that you can live without for a year. There's no paying for rent or groceries with an I-bond. If you cash in on the bond after one year but before five years have passed, you'll get a small penalty of three months worth of interest. So for example, if you cash in on your I-bond after three years, you'll get back two years and nine months worth of interest. However, if you cash in your bond after five years, there's no penalty. You get your investment back, plus all of the interest you've accrued. The bond matures

completely after 30 years. So once 30 years has passed, the bond will stop collecting interest. So once those three decades are up, if you haven't already, cash that baby in because it won't be generating any more interest. And there are two bits of good tax news with I-bonds. First, when you cash in an I-bond, you don't have to pay state tax on that return. Yay! However, you do need to pay federal income tax. Boo. And I-bonds can actually be tax-free if that money from the bond is used for a higher education cost in the same year you withdrew the money. But in order to get that tax break, you also have to meet certain income requirements.

I'll link more about that in the show notes. The minimum amount you can buy in a series I-bond is $25, and the maximum is $10,000 per year. But any amount between the minimum and maximum is totally fair game. You can buy an I-bond for $9,999.99, or you can buy an I-bond for $1,234.56, or 1, 2, 3, 4, 5, 6. You get the picture. For today's tip, you can take straight to the bank. If you're sold on I-bonds, which I'm hoping you are, you can buy them online at treasurydirect.gov. You'll need to create an account, which is easy to do, and their site is pretty easy to navigate. Remember, choose to invest the amount that you don't need for the next year. Instead, look at your 5 to 30-year goals and invest in yourself because there is an I in Ibot. Sorry, I had to.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing,

engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.