Maybe the current state of the market has you spooked or maybe having a percentage of your investment cash in a risk-free account is a part of a well thought out asset allocation plan.
Whatever the case maybe, exhaust one other option before considering CDs.
I’m not talking about taking on more risk - the goal should be the same as in the case of CDs:
Maximize returns without the risk of losing the principal.
Certificate of Deposits
This is a screen grab from Ally bank which offers pretty competitive rates in my opinion. The best Ally can offer on a 1 year CD is 1%.
Series I Savings Bond (I Bond)
The current I-Bond rate good till end of April 2012 is 3.06%. That’s thrice what a 1 year CD offers! Sure this 3.06% is good only for 6 months, but unless you believe we are headed towards serious deflation, chances are that the new rate in May 2012 will still be pretty good since this rate is based on the rate of inflation as determined by the Consumer Price Index.
And that’s exactly what I-Bonds stand for: Inflation protected bonds.
Tell me more!
Ever heard tales of how by not investing your money in the stock market means you’ll still lose money due to the ravaging effects of inflation? Well, by investing in I-Bonds, you won’t beat inflation, but your savings won’t erode either due to inflation.
I-Bond rates are adjusted twice every year to keep up with the rate of inflation.
- I-Bonds have a minimum term of 1 year
- You can hold an I-Bond for upto 30 years
- An I-Bond has two rates. A fixed rate that remains the same for the life of the I-Bond and a variable rate that adjusts every 6 months according to the inflation rate
- The current fixed rate for an I-Bond is unfortunately 0%, reflecting trying times, and the inflation rate is 1.53% for a composite rate of 3.06%
- I-Bond rates are adjusted twice every year – once in May and once in November
- If you redeem an I-Bond before 5 years, you’ll lose the last three months of your interest. That’s interest, and at no point will there be a reduction of your principal. After 5 years, there is no penalty
- I-Bonds are free from State and County taxes. You only pay federal taxes. (Eat that CDs!)
- You can purchase upto $10,000 in I-Bonds. $5000 electronically and $5,000 as paper bonds. Paper I-Bonds look awesome by the way, and this is your last chance to get them. They are going away starting next year!
- You can purchase I-Bonds from your local bank or better still, directly from the treasuries website
That’s pretty much what an I-Bond is. Inflation protected, federally insured savings bond. Sure there is a limit of $10,000 per person per year, but if you have more than $10K, exhaust your I-Bonds first before stashing your cash in CDs.
Did You Know: You can request your tax refund as an I-Bond?
Still not convinced?
Remember the lost decade? It’s called that because the market returns for the period 2000-2010 was an anemic 0.31%.
$10,000 invested in the stock market in 2000 would’ve grown to just $10,400 (dividends included) by the end of 2010.
The same $10,000 invested as I-Bonds, would’ve grown to $19,252 by the end of 2010 at the annualized rate of 4.97%!
This is not a rant against the stock market, but I believe in a well allocated investment plan, risk-free investments like IBonds (& CDs) should have a place.