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Playing Offense Instead of Defense: Series I Bonds

Brendan discusses another way you can play offense during times of high inflation while other people are playing defense. In this video, he talks about Series I Bonds that are issued through the US government, specifically through, and their benefits and drawbacks.

Topics Discussed:

  • Benefits and drawbacks to Series I Bonds

  • Scenarios for ownership of Series I Bonds

  • How to purchase Series I Bonds


Hi, and welcome to another edition of coffee with Brandon. This time we're going to talk about I bonds, Series II bonds that are issued through the US government, and specifically Treasury This is a continuation of a theme that I've been kind of harping upon for the last few months, which is playing offense when other people are playing defense. So specifically around the, the concept of, of inflation.

And as I've talked about in the past, inflation is a double edged sword. If you are the seller, of good seller of services, and you're increasing the price of your services or goods, then that's a good thing, and inflation is good for you. But if you are the buyer of something, good services, then it's not so good. So take the example of a house, if you're selling a house, this inflation is great for you, because you're getting top dollar for your house. But of course, if you're the buyer of that house, it's not such a good thing, because you're paying much more than you would have just two and three years ago.

So similar thing with the I series i bonds. And there's a very, very good reason that I'm talking about it today, on April 20, because on May 2 2022, the interest rate is going to change on the series I bonds, and potentially, and probably I should say, it's going to go up to over 9%. So when you're looking at savings, bonds, US savings bonds, they are some of the most conservative investments out there. And if you're getting a 9% interest rate, that's that's historically speaking up there with regular stock market like investments. And if you're getting 9% with something that's very, very conservative, that's a fantastic risk return ratio. And that's what we're always harping on with clients is looking for investments that have on relatively low risk for a high rate of return.

So let's jump into this. We'll go right to the Treasury website. And one thing that will jump out to you right out of the gates, is if you've been someone that goes on the internet a lot, you look at a website like this, and you think that it might be a spam website. But no, this truly is the US Treasury Department's website. And it's not the simplest thing to navigate, but we'll work through it. So if you look on the left here, one of the things that shows is how to buy Series II bonds.

So let's get into this and talk about some of the big benefits and drawbacks to the series I bonds. So let's just go right down the list here, what is an eye bond, it's a security that that earns interest over a 30 year period, every six months, the interest rate can change and it changes with the rate of inflation right now, because because inflation is so high, the interest rate on this is 7.12. This will re calibrate and come up with a new interest rate and may 2 2022. And many people are saying that that interest rate may jump up to over 9%. And again, as I mentioned, if that happens, which should, in all likelihood should this could be a really good investment for you to consider.

So who can own them, individuals can own them, children under 18 can own them. And trusts estates corporations can in electronic form but they can't not all of them can own them in paper form. So long story short, most people are going to be using the electronic using this Treasury website. And if that's the case, the electronic bonds pretty much come in any denomination. So you could buy in this case a $50.23 cent bond if you chose to do so. This is one of the key drawbacks right here is that the maximum amount of series of bonds you can buy in any one calendar year is $10,000. Now, if you are married, then you and your spouse can each have $10,000 If you have kids, they can each have $10,000 And if you are a small business owner, you could actually own a savings Series II bond in the name of the company. So let's take an extreme example here.

From We have a small business owner who's married and has two kids. That small business owner technically as a family unit could have $50,000 of series i bonds 10,000 for the corporation, 10,000 for business owner 10,000 for business owner, spouse, 10,000, business owner, Kid number 110 1000, Kid number two, so you could technically do that. But you would have to have five different excuse me five different accounts. Another another way to buy into the bonds to give yourself a little bit more is using your tax refund, you can buy up to an additional $5,000 per year. So you could technically get $15,000 per person if you had the foresight to allocate some of your tax refund to Treasury And yes, you can buy them for as gifts, they don't count against you, they would count against the person the gift recipient.

Couple other couple other details that you need to know about the Series II bonds is that you have to hold them for one year. So these are the rules associated with them, you have to hold it for one year. So it's definitely not money that you are going to need to access or liquid money that you will need to access within one year, there's no way that you can get that money back out within that year. The other piece of this is that there is a three month interest penalty if you redeem them between year one and year five, after year five and all the way up through year 30. That penalty goes away. But if you do redeem them between that first year, and year five, there is a three month interest penalty associated with this.

So let's work let's go through a timeline of a savings bond. So a lot of people are eyeing that may 2 2020 To date, because they think that the interest rate will jump up. So let's say that we buy $10,000 of a series I bond on May 2, so for the first six months, you'll enjoy that 9% interest rate, but then come November, they will change that interest rate to whatever the in concert with whatever the inflation rate is at the time inflation keeps going up, then that 9% may even go up even higher. If on the other hand, like most people think inflation will come down by that point, the interest rate could change. So let's just use a easy example here. For the first six months you are in that 9% The second step, the second six months, you earn a 7% rate of return. So it on the average over that 12 month period you'd have about an 8% interest rate. But remember, you'll have to give up three months worth of that 7% interest rate if you redeem it, may 2 of 2023. So long story short, in total, you'll probably earn you know, if you hold it for just that one year, you'll probably earn an interest rate of about five to 6% on on an investment that's superduper conservative. So it definitely is something that you should think about, especially if you're investing money at the bank. And you know, I just took a look at the agenda, look at the interest rates that Bank of America is offering for a one year CD because I kind of liken this to a one year CD in in terms of how aggressive or not aggressive it actually is. And in this is what we're looking at. So this is Bank of America's website. And you know, there are two CD options here you go with a $10,000 minimum and then $1,000 minimum, you're looking at an APR of just literally a pittance and this could actually increase your interest rate by a significant amount by using the Treasury website so hopefully this will be helpful to you.

And you know if you do want to do this unfortunately way mark is not some not a place that you that we can help you out with this. This would be something that you would have to go to Treasury and buy it on your own. But you know it is a fairly straight afford a fairly straightforward process to go through. I do wish it was a little bit more user friendly because again, that web interface is probably about 10 to 20 years outdated. But that's my own personal gripe.

Again, hopefully this was helpful to you, hopefully you can get a little bit more rate of return on some of the money that you've earmarked for your not short term liquid money but something that is one year plus out that you know, you're not going to use and you can make a little bit of money while inflation is as high as it is right now. Thanks so much and we'll look forward to the next time we get together.


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