24 Feb Are I Bonds really paying more than 7% interest?

Q. I just read that Series I Savings Bonds will pay 7 1/2% interest for the first six months after purchase. This seems out of line with current interest rates and I am wondering what, if anything, I am missing. Please provide any insight on these bonds and what we should know before purchasing.
— Investor

A. We’re glad you’re asking.

And you’re right: Most banks are still paying paltry interest rates, even though inflation is on the rise.

You are generally correct that Series I Bonds are currently paying more than 7% annual interest in the first six months your own the bond, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

He said you should keep in mind that the 7%+ rate is for a 12-month period and will only be the rate for a maximum of six months.

There are two parts to the interest rate calculation on I Bonds.

The first part is a “fixed rate” based on current interest rates. The second component is an inflation rate.

“Due to the current inflationary environment, the inflation rate that is higher than we have seen in many years,” he said. “I Bonds have become more popular recently due to the high rate of interest they are currently paying.”

But there is a downside, Van Leeuwen said. The rate can change every 6 months based on current interest rates and inflation readings.

“There is no guarantee that the bonds will continue paying over 7% after the rates change,” he said. “The other limitation is the amount of these types of bonds someone may buy in a year. The government restricts the dollar amount a single person may purchase in any given year, which can limit the ability to put meaningful allocations into these types of bonds.”

You can learn more about these bonds at TreasuryDirect.gov.

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This story was originally published on Feb. 24, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.