The Personal Finance Podcast - How to Get a Guaranteed 9.62% Return with I-Bonds

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Starting point is 00:00:52 Learn more at tellus.com slash online security. No one can prevent all cybercrime or identity theft. Conditions apply. On this episode of the Personal Finance Podcast, we're going to talk about iBonds and how you can get a guaranteed 9.6% return with iBonds. What's up, everybody? Welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be talking about how to get a guaranteed 9.62% return.

Starting point is 00:01:45 with iBonds. If you have any questions, hit me up on TikTok or Instagram at Master Money Co. And follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast to. And if you want to help out the show, leave a five-star rating and review on Apple Podcasts or Spotify. And don't forget to check us out on YouTube as well.

Starting point is 00:02:06 We are Master Money over on YouTube. Now, today we are going to be talking about a pretty hot topic in the finance world, which is iBonds. And inflation has been rising, and it's rising faster and faster every year at the time I'm recording this. Right now, inflation just came out that it is 9.1% at the time I'm recording this. So you have to come up with a plan to combat against inflation, because the more cash that you hold, that cash is losing value every single year. But your boys got your back, because we're going to come up with a bunch of different plans

Starting point is 00:02:40 on how to combat against inflation. And one of the biggest ways to do this is to invest your dollars. We've talked about that a number of times on this podcast. You need to invest your money to combat against inflation. But there are other things that the government actually offers for you that are going to allow you to combat against inflation as well. And one of the biggest ones in the hottest topics right now are iBonds. And there's a number of frozen cons to iBonds that we're going to get into in this episode.

Starting point is 00:03:04 But iBonds are something where the government actually issues a bond to you and allows you to get a guaranteed rate of return. Now, that rate of return fluctuates with interest rates. and it fluctuates with the inflation rate. But it is something that is guaranteed for that specific time frame. So is this something that you should be considering? And is this something that you should be looking into? We're going to dive into that today.

Starting point is 00:03:26 So today we're also going to be talking about what are bonds and what are I bonds. And we're going to get into how to get more money into I bonds, because I bonds have a yearly limit that you can put into I bonds. So how do you get more dollars into I bonds? We're going to go through the pros and cons of I bonds because there's a lot of pros, but there's also a lot of cons. and there's things that you need to be considering when you're looking at iBonds to see if this is actually the best decision for your specific situation. And then I'm going to go step by step on exactly how to buy Iibon so that you have a way to see, hey, should I be doing this?

Starting point is 00:03:57 And I'm going to provide you a cheat sheet in the show notes below. So if you want to download the printable sheet sheet so you can go out and buy Ibonds as well and follow along with that checklist, you can utilize that checklist. I want to provide that free value to you guys. So I have a free cheat sheet in the show notes below. And then would I bonds be suitable for something like an emergency fund? Would they be suitable for short-term savings goals? And should you invest or should you buy I bonds? What is the better option in today's market?

Starting point is 00:04:23 Those are all the things that we are going to be going through in this episode. I'm so excited for this episode and to share this information with you guys. So if that's something you're into, let's get into it. All right, so the first thing we're going to dive into is what actually is a bond. Now, we haven't really dove deep into bonds in this podcast. The reason why is if you have a long time horizon, bonds are almost a waste of time in my book. Now, bonds are going to help you hedge against specific inflationary events. They're going to help you hedge against volatility.

Starting point is 00:04:52 So if you're somebody who is getting closer to retirement age, then you definitely want to have some bond exposure in your portfolio. And we're going to have a future episode coming up on how to do your asset allocation for your portfolio so that you guys can actually consider, hey, how much money should I be investing in bonds, how much should I be buying in stocks or international stocks, or what type of stocks should I be buying? should I do that? So we have an episode coming up on that. So stay tuned for that. Make sure you subscribe to this podcast to check out that episode. But bonds are something that's going to help you against volatility. And if you don't know what a bond is, if you've never heard the term bond, it's a fixed income instrument. And it's essentially represents a loan made

Starting point is 00:05:25 by an investment to a borrower. So there are things like corporate bonds where you can actually loan money to a corporation. There's government bonds where you're loaning money to the government. And what happens is you're going to give that money to the government or to that corporation for a fixed amount of time. So, for example, a lot of government bonds are 10, 20, 30 years. A lot of corporate bonds, it just depends on what the agreement is. It could be 5, 10, 15, 20, 25 years. And then you lock in that interest rate on those bonds.

Starting point is 00:05:51 Now, the interest rate on bonds are typically much, much lower than stocks are. So when you're looking at the interest rates on bonds, that is why if you have a long time horizon and volatility doesn't really bother you, then I would rather you consider in researching having more exposure to stocks than you would bonds. And that's the real reason why. So the government issues something called an I bond. And the I bond is a savings bond that earns interest based on combining a fixed rate and the inflation rate. So the I bond considers a number of things. And it's issued by the U.S. government. This is a U.S. government bond. And the two things they consider are the fixed rate or interest

Starting point is 00:06:29 rates that are going on right now. So when the Fed raises interest rates, then there's a very high chance that the percentage of I bonds is going to go up as well. And it also considers the inflation rate. So as inflation rises, this is a way for the government to help people hedge against that inflation rate. Now, there's a couple of things to consider here because the I bond has a combination of that fixed rate, the rate that you buy the I bond at, and then it adjusts for inflation twice a year. So it can go up or it can go down twice a year. That is one con to I bonds, and we'll talk more about that here in a second. But say, for example, you buy an I bond today, and right now, at the time I'm recording this, I bonds are at 9.62%.

Starting point is 00:07:07 But inflation just rose. And interest rates are going to be rising as well. So I expect that number to actually go up sometime in the near future. But in the long-term future, I expect that to go down significantly because we're not going to have 9% inflation for the next 20 years, for example. So you have to consider all of these things as you go through this. Now, what about the taxes on iBonds? There is federal income tax, but there's no state or local tax.

Starting point is 00:07:30 And you can buy them paper or electronic. The way I'm going to show you in the step-by-step guide is electronically because who buys bonds by paper anymore. And electronic is just a faster and somewhat easier way to do it. And the minimum purchase is less. So if you buy one with electronic, you only have to buy $25 worth of eye bonds as a minimum purchase. But if you buy it with paper, you have to buy $50 worth. And then there's a maximum purchase.

Starting point is 00:07:52 So the maximum amount of eye bonds that you can buy every single year is $10,000 per year if it's electronic. And $5,000 per year if it's on paper. So that's another reason why you should go the electronic route, because you can buy more iBonds in that way now i'm going to show you how you can actually get even more money into an i bond that most people i haven't heard talk about yet and we're going to talk about that here in a second so that you can get as much money as you want to so that you can get more money into those iBonds if you want to get that guaranteed rate of return and then the question may come up well how long do you have to actually keep an iBond well iBonds earn interest for 30 years unless you

Starting point is 00:08:26 cash them first but you have to wait a year before you can cash an iBond so you can't cash them prior to a year. So you have to ride out that interest rate, those two interest rate adjustments throughout that entire year. But if you cash them before five years, you lose the previous three months of interest. So say, for example, you cash an I bond after 18 months, then what you're going to get is the first 15 months of interest. You won't get that final three months of interest. Is it still worthwhile? Most likely, if you're going to get that guaranteed rate of return, it's better than that cash sitting in the bank if you're going to leave that cash in the bank. But is that ideal? No. So you have to consider,

Starting point is 00:09:01 What is best for your specific situation? But just know that. If you cash those iBonds before five years, you lose the last three months of interest. Now, if you're holding on to those iBonds for a couple of years, that's not really a huge deal because it's only the last three months of interest.

Starting point is 00:09:17 And then where do you buy an iambonds? So you buy them on Treasury Direct online, or by paper, you do it by mail when you file your federal tax return. So those are some of the quick facts about iBonds that I want you guys to understand. And then we're going to get into some of the nuts and bolts here. so that you can see, hey, should I be buying iBonds?

Starting point is 00:09:34 Is this the best option for me? All right, so first let's talk about how to get more money into iBonds. So with iBonds, you have that $10,000 yearly limit. But if you want to get a taste of those guaranteed returns and get more money into Ivonds, there's a couple of ways to do it. The first one is if you're married, because if you're married, you as an individual can buy $10,000 per year worth of I bonds, and your spouse can buy $10,000 per year worth of I bonds.

Starting point is 00:10:01 iBonds. So in that situation, each household can get $20,000 per year into an I bond. Now, this does not have to be within one whole year. You could buy $20,000 worth of I bonds in December and then buy another $20,000 worth of I bonds in January. It's just within each calendar year. The second way you can get more money into I bonds is if you have a business. So you can actually get money into I bonds. Your business can buy iBonds as well to hedge against inflation. So if you have a business, you go through the Treasury Direct Process as a business and you can get another $10,000 into I bonds. And then the next way is you can buy IBonds in a trust with $10,000 per year. So the way to get more money into Ivonds is to use other entities. So a business or the trust. So here's an example of this.

Starting point is 00:10:51 Say for example, you're married and you and your spouse each buy $10,000 with a buy bonds. And you also have a business. Well, within that business, you can go out and buy $10,000 with the iBonds within your name. And then your spouse is also in charge of a trust. Well, then your spouse can go out and buy another $10,000 of Ibon. So that gets you $40,000 per year that you could be potentially buying an I bonds by utilizing other entities as well. So most people think they're capped at the 10 grand, but that's just not the case.

Starting point is 00:11:16 You can actually do it this way and get more dollars into I bonds to get that guaranteed rate of return. Now, the account at Treasury Direct, if you want to do it through a business or a trust, is called an entity account. So you're going to have to sign up for an entity account with your business or with your trust and do it that way. And if you're doing this, say, at the very end of the year and you have a lot of cash that you're just sitting there and you don't want it to get eaten away by inflation, let's say you have 80 grand worth of cash, where you could buy a bunch of iBonds in November, December, and then do it again in January, February. So you're getting

Starting point is 00:11:47 $80,000 into those i bonds if you have all these entities available to you as well. So I don't hear a lot of people talking about that. So that's one thing I wanted to note for you guys is you can get more money into iBonds than just that $10,000 a year, but you have to get a little bit creative and look for some of the loopholes that are available to you so that you can get more dollars in there. Now, let's get into the pros and cons of iBonds. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking.

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Starting point is 00:14:53 Ooh, then it's the vacation of a lifetime. I wonder if my head of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. All right, so I Bonds have a bunch of pros, and they have a bunch of cons. And I'm going to talk through some of these

Starting point is 00:15:20 so that you can figure out what is best for your situation, because I don't think they're for everybody, even though you do get that 9.62% rate of return. And I'll tell you what I'm doing with I bonds as well, if I'm buying I bonds, if I'm not buying I bonds, and how I'm going through that situation as well. So the first pro is obviously the high returns. So 9.62% at a guaranteed rate of return,

Starting point is 00:15:41 which is what it is right now, is a fantastic return. Now, if the return is much lower than what it is right now, let's say you get a 2% or 3% rate of return, that's absolutely not worth it. But in times when I bonds are high and you don't know what to do with cash, that's a great place to park that cash

Starting point is 00:15:57 if you don't need that cash within a year. Because at that high rate of return, it's only going to adjust twice and the likelihood of it adjusting, say, getting cut in half within that year timeframe, is not very high. Now another pro is there's no risk to your principal, meaning there's no risk to the amount of money

Starting point is 00:16:12 that you're actually putting in that I bond. See, when you buy a stock, your principal is always at risk because the stock market could go down. and for that time frame, the amount of money that you have invested could go down. Now, if you're a long-term investor like we are, like we teach here at the personal finance podcast and amass your money, then you don't care if it goes down in the short term because in the long run, we know the stock market goes up in the long run.

Starting point is 00:16:33 But the cool thing about iBonds is there's no risk to that principle. So you put $10,000 in, you're at least going to get $10,000 back by the time the I bond matures in addition to the interest that you signed for. Now, when it fluctuates, you're still going to have some interest there as well. through at least for sure getting that principle back because it's backed by the government. Another pro is that iBonds have some tax benefits. So they do have some flexible tax benefits. So for example, I bond holders can opt to defer I bond interest until maturity or redemption.

Starting point is 00:17:03 So if you're in a high tax bracket, you can actually defer that interest until maturity or redemption. If your tax bracket goes lower, then maybe your capital gains tax will be a little lower. Now, another thing that you can do with an I bond is you can pay for college tuition with it. An income from an I bond may be tax exempt for lower to middle income families if you use the bond to pay for college tuition. So that's actually a very cool tool to be able to utilize that. But for the long term, we've talked about that on this podcast here. It's not our number one way to save for college.

Starting point is 00:17:34 Our favorite way is using a couple of other different methods, including the 529 plan. We have an episode on that. We'll link it up in the show notes so that you can check that out. But it is a way if you're getting closer to having to pay for college tuition, maybe you get that guaranteed rate of return over the course of a year, and then you can utilize that money and maybe get a tax break if you're in the middle to lower class. Now, here's a con on Ivon. One con is it limits the amount of I bonds that you can purchase. So you can't just dump all of your money into I bonds. There's $10,000 per individual and then $10,000 per entity. So you can't

Starting point is 00:18:06 dump it all in there. But we do have some loopholes that we can get more money into I bonds if you have a few entities or if you're married. So that's one thing to consider. Another thing is you can get another $5,000 into Ivons with your tax refund. So you are still limited on the amount of money that you can put into an Ibon. And at 9.62%, if you have cash sitting there, that would be something I would consider. If you don't need that cash within a year's time frame, I would consider getting as much of those dollars as I could into Ivons if it's just going to sit in a savings account. Now, here's another pro. Returns may go higher. So if the Fed decides to raise the fixed interest rate, which is very likely, and you can go look and there's a number of articles like in the Wall Street Journal and CNBC,

Starting point is 00:18:44 There's a number of articles out there saying that it's very likely that these fixed interest rates are going to be rising over time. Then you may get a higher return because those fixed interest rates are rising. So that may be something that benefits you. But here's another con. It must be purchased through the Treasury. So the only way to buy iBonds is through TreasuryDirect.gov. And it is one of the most clunky websites you will ever see in your life. It looks like it was built in 1990 and they haven't updated it whatsoever.

Starting point is 00:19:13 and it's kind of difficult to navigate, to be honest, because if you're tech savvy and they're used to beautiful dashboards and things like that, this is not it. And what happens here is the buying process can then become problematic. Because what happens here is it's really not user-friendly. And I've had people tell me that they've been on the Treasury Direct site and then they get locked up in the Treasury direct site and they have to wait well over an hour just to get unlocked because it's just not working properly at that time. And I've seen that happen a number of different ways where it's very frustrating sometimes to buy iBonds. We can go out and buy a stock in two seconds. You have to wait on the Treasury direct site, and you have to work through all these complications

Starting point is 00:19:47 to actually get your eye bonds. It's a very frustrating process. Another con is that you need to document and track your purchases. So they're not sold by brokerages or bank, and you know, at the end of the year, your brokerages tell you, hey, here's how much stocks you bought, here's how much bonds you bought, here's what your investments were throughout the year. Here's how much you need to pay in taxes. They give you a nice, beautiful form in a nice format so that you know exactly what happened.

Starting point is 00:20:09 You can hand your CPA or TurboTax or however else you do your taxes. And it's a very easy process. But with iBonds, you actually have to document it yourself. So you have to be very careful to document the process so that you understand and have the proper return. And your accountant can actually give you the proper return when it comes tax time. So this is just another hassle that you have to go through when you buy iBonds. Now, another con, and this is a big one for me with iBonds, is that there is limited liquidity. So what does that mean?

Starting point is 00:20:37 What that means is you can't access your money very quickly. So if you have to buy an iBond and you need that money within a year, you can't access that money within the first year's time frame. So you have to wait a year before you can get that cash out. So if some crazy emergency happens, you have no liquidity to get that money out. That is a problem for a lot of people if you're just getting started investing. Another con is that you cannot purchase iB within a retirement account. So if your main strategy is the Roth IRA or an IRA or a 401K or a 403B, you can't buy iB and a retirement account, get some of those. tax benefits and let that account grow over time.

Starting point is 00:21:14 So if you're taking dollars from your retirement accounts to put into I bonds, that's not something I would really truly consider. What an I bond is great for is if you have cash sitting idle in a savings account. And then the last con we can talk about is inflation. So I bonds have a high interest rate because inflation is really high. So really, when you're looking at it that way, your money is actually turning out to be close to a loss. It's a little bit higher right now than it is at the inflation rate.

Starting point is 00:21:38 but it's really not a good rate of return if you adjust for inflation. So usually when the I bond rate of return is higher, it's not a good thing because inflation is surging over that time frame. But if you have money that's sitting in cash, if you have it sitting in a savings account, an I bond is a really good option. So I'm going to give you a step-by-step guide on how to buy I-bonds. And we have a printable down below. So I'm going to run through this quickly.

Starting point is 00:22:01 You can grab that principle if you want to see some more details on this so that you can follow it step by step to buy your first I bond. All right, so here's the step-by-step guide to buying iBonds. Number one, you've got to determine if you qualify. So the first thing you want to do is you have to either be a U.S. citizen, even if you live abroad, or a civilian employee of the U.S. government, or a U.S. resident. So those are the three things that you need and determine if you actually qualify to buy an Ivon. Number two, you have to set up a Treasury Direct account.

Starting point is 00:22:31 So it's Treasury Direct.gov, and if you meet the qualifications, you can actually proceed to opening that Treasury Direct account. So what you're going to need is you're going to need an ID, like a Social Security number. You're going to need an address of record. You're going to need a checking or savings account, an email address, and a web browser that supports 128-bit encryption. So most web browsers support that, unless you have AOL dial-up or something, but most web browsers will support that.

Starting point is 00:22:55 If you're listening to this podcast, likely your web browser supports that. Then you enter all your information in the prompts and go through the process there. Then you're going to place an order. So when it's time to place an order, you have your account set up. You have all your information into the account through the clunky Treasury Direct website. Then it's time to actually place an order. So what Treasury Direct will do is they're going to email you your account number. And then what you select is the button that says buy direct.

Starting point is 00:23:19 And then you can go through the process to actually buy your iBonds. So for electronic bonds, if you're doing it through TreasuryDirect.gov, it's the minimum amount is $25. And obviously, the maximum amount is up to $10,000. So that's the range that you can buy them in. So that's the process in a simple way. We have more details on the checklist, so make sure you check that out. And it's something you really want to set aside, because of the clunkiness of the website, you really want to set aside like an hour to do this because it is something that is not the fastest process in the world.

Starting point is 00:23:48 Now, what we're going to talk about is should you buy iBonds for an emergency fund? And would iBonds be suitable for short-term savings goals as well? And then the last thing we're going to tackle here is should you invest your money or should you buy iBonds? Now we're going to tackle would I bonds be suitable for an emergency fund? Now let's think about this for a second. Because you have to leave your money in I bonds for at least a year, I would not use I bonds for my emergency fund. And that's the main reason why.

Starting point is 00:24:16 Because emergency funds are for emergencies. If something comes up out of nowhere, you need to be able to access that money. That's why we always recommend keeping your emergency fund in a high yield savings account. Because you need that liquidity, you need that money available to you so that when life throws these things at your way, that money is just there and it's available. It's going to be much more stressful for you, and it's going to create anxiety for you if you have to go through the Treasury direct site, try to pull that money early, which you cannot do. They do not want you doing.

Starting point is 00:24:44 So it's not going to be an easy process when you need the money most. So if you want to reduce that stress, reduce that anxiety, I would not put my emergency fund inside of an Ivon. Now, if you have like a three-year emergency fund, let's say you're approaching retirement. And if you're approaching retirement, you should have a much larger emergency fund so that you can hedge against downward market turns and things like that, I think you should have a larger emergency fund. So if you have a two or three year emergency fund because you're approaching retirement,

Starting point is 00:25:09 let's say you've a cheap fire or you're financially independent, and you have a longer emergency fund, then maybe you could do year two or year three into an eye bond as long as you're not going to need that money within that year. But that's the only situation that I don't even consider it. And for most people, I would not put my emergency fund at risk. That money is there to save your butt when life throws things at you, which we know life will.

Starting point is 00:25:31 everybody's had a situation where you've had an expense come up and you did not expect it. And that's what the emergency fund is there for. But then the next question comes up. What about short-term savings goals? Let's say I want to buy a house in two or three years. Could I use I bonds for that situation? In that situation, as long as you're not going to need the money for two or three years, four years, five years, whatever it is, short-term savings goals that you're just not going to need within a year, then absolutely you

Starting point is 00:25:56 could buy iBonds with that money. Now the con to that is you can only put $10,000 a year. So if you're trying to save up for a down payment on a house, what you would have to do is either try to get more money into that I bond up front so that when you need the money, it actually has a growth and a rate of return on it, or utilize it if your down payment is not going to be needed for the next three, four, five years, something like that. Same thing for a car payment or whatever else you're saving for,

Starting point is 00:26:18 if you're saving for a wedding or whatever else it is, and you don't need that money within a year, then you could definitely utilize I bonds to get a nice rate of return on your money specifically within the next year because that rate of return should stay somewhat steady within the next year or so. Now, the big question that comes up, what am I doing? And should you invest or should you buy iBonds? So what I'm specifically doing is I am not buying iBonds currently.

Starting point is 00:26:42 And the reason why is that I take as much of my extra dollars as possible and I invest those dollars and put those dollars to work. So I am continuing to invest those dollars. The only free cash that I really have that I let sit in a savings account right now is an emergency fund. So every extra dollar, I'm looking to invest those dollars. Specifically when the market is down, at the time recording this, the market is down. I'm trying to buy as much as I possibly can because the market is down, because you want to buy low and you want to sell high. So the more dollars that you can put into investments means that over the long run, your rate of return should be somewhere close to where the I bonds are right now.

Starting point is 00:27:18 But why would I put into an I bond when the rate of return of the S&P 500, for example, has been over 10% over the course of the last 50, 60, 70, 80 years since 19. 28, the rate of return for the S&P 500 has been over 10%. So for me, specifically, I am not buying I bonds for that reason. Now, if I had cash sitting there, like if I was waiting to buy a house or a down payment on a house, or if I had cash shitting and I didn't know what to do with it yet and I was going to let it sit in a bank account, I would absolutely be buying eye bonds because you're going to at least get that 9.6% rate of return where that money can absolutely grow. But if it's not sitting idle and you're looking to invest those dollars, in my personal

Starting point is 00:27:57 opinion, I'm taking my dollars and I'm putting them towards investments. Now, if I start saving up for more rental properties or things like that where I want to put more cash towards rental properties, and I don't need to use that money within the next year, I will definitely be putting that money into I bonds if the rates stay as high as they are. Because I think it's something that you could definitely benefit from if that's the case. But for me specifically, I don't have cash sitting idle right now. So if you're trying to choose between an investing or buying I bonds, I prefer investing in that situation because I think your investment, we're turns over the long run are going to be much greater than they are just sitting in an eye bond.

Starting point is 00:28:31 So that is what I am doing personally. And if you guys have any questions on that, hit me up on social media wherever else, TikTok, Instagram at Master MoneyCo. And I can talk through exactly your specific question as well. Thank you guys so much for listening to this episode. I truly appreciate each and every single one of you. If you guys have any questions, like I said, hit me up on social media at Master MoneyCo. And don't forget to follow this podcast.

Starting point is 00:28:52 And please, thank you so much for leaving those five-star rating and reviews. It helps us spread the message. of wealth building to other people. And that's what we want to do. Our entire goal is to teach as many people as possible how to build wealth. And that's the best way that we can do it is by you leaving that rating and review.

Starting point is 00:29:08 We can't thank you guys so much for that. And please share it with your family and friends as well. That is a big help as well so that more people can learn how to build wealth over time. Thank you guys so much for listening to this episode. I appreciate each and every single one of you and we will see you on the next episode. Frozen lasagna, medium power, 15 minutes.

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The Personal Finance Podcast - How to Get a Guaranteed 9.62% Return with I-Bonds

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