Don’t park your cash in CDs until you’ve at least considered this alternative!

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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

CD Rates from Ally Bank November

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)

IBonds and EE Bonds Rates - November 2011
Here’s a screen grab from the treasuries website.

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%!

IBonds

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.

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34 thoughts on “Don’t park your cash in CDs until you’ve at least considered this alternative!

  1. Great information. I learned something new today and appreciate it a lot. Thanks.

  2. Great post. I need to learn more about bonds… you kinda have me sold. I know I’m supposed to leave my e-fund in savings but with such itty bitty returns I’ve been thinking of moving it. Even if we had to get some money out I’d be willing to lose the 3 months of interest. It would be for an emergency, I’m not going to cry about a little interest.

  3. I love savings bonds. I never got them as gifts growing up, but my husband did, and having them to cash in when we ran into money problems in our early marriage was a godsend. Plus, you’re very right that the interest is looking pretty good right now!

  4. I have to agree, and like your presentation by the way. Bonds definitely have their place in a balanced portfolio.

    • True Hunter. I wouldn’t advice anyone to move all their money to IBonds, but IBonds are better than CDs right now. Plus they are free from state and local taxes.

  5. I received savings bonds as a gift as a child. They were great when I cashed them out 15 years late. I still have some left. Thanks for reminding me of this savings tool ;)

  6. TIPS as a mutual fund are yielding close to 10% YTD.

  7. Nice overview of an often over looked investment product.

  8. I love that Ally advertises their 1% rate as “HIGH YIELD”. That’s hilarious. You’re offering an income investment that is losing money to inflation. And that is considered High Yield. I guess you can call anything high yield.

    • Comapre Ally’s rate to :

      WellsFargo: 0.05%
      Chase : 0.25%
      BofA: 0.35%

      That’s 3 times BofA’s rate and 20 times Wells Fargo’s.

      It’s all relative Darwin.

      You make a good argument about losing money due to inflation. That’s why this post is about why you should invest in IBonds, that *keeps* up with inflation and not CDs! ;)

  9. Informative post Money Cone! That 3.06% sure looks good! I’m guilty of putting a lot of my savings into CDs. Rates are so low that I haven’t even bothered this year yet but I’ll have to consider I-bonds now as a good alternative. -Sydney

    • As I mentioned, if one had invested money only in IBonds during the lost decade, he/she would’ve gotten a pretty decent return.

      Not saying you should, but something to think about.

  10. I often think about EE bonds but I bonds never really come up. You make a really good point here. And now that Treasury Direct is going to be easier to use, it could be a great option.

    • They’ve made owning an IBond real easy! There are no commissions or fees either. I wish more folks would make use of this.

      I want to get a paper IBond as a souvenir, since this is the last chance I have to get Paper bonds!

  11. I have about 8% of my portfolio in bonds, but I never purchased them myself. The company match and Mrs. RB40′s retirement plan has bonds in them.
    I’ll keep this in mind before I buy any CD though.

  12. Interesting post MC, I have about 40% of my retirement savings in a short term bonds ETF which pays a similar 3%.

  13. Good post, MC. I suppose this would be a good cash alternative in a Roth IRA.

  14. MoneyCone, thank you so much for this post. I have been trying to think of a way to allocate some cash, and IBonds might just be the vehicle I am looking for.

    Great post!!

  15. I-Bonds are a great place for savings (as opposed to investing). I have been purchasing I-Bonds for over 10 years but did not know you could request your tax refund as an I-Bond.
    Thanks for the useful information!

  16. Just keep in mind the interest rate resets twice a year for the duration of the I-bond. So the 3%+ rate is only good until January, at which time it could reset higher or lower. Your principal is not at risk but the interest rate will be variable over the life of the investment. The main risk, in my opinion, is that real inflation will be higher than gov’t reported inflation.

  17. Hi Money, I’ve been writing about I bonds and TIPS as well. There really the only place to get some safe yield today and keep up with inflation!

  18. Yeah, leaving cash in CDs doesn’t help you too much. I Bonds could be a good alternative for many people

  19. MC, this is great information and very timely. Thanks so much!

  20. I definitely learned something new today! I didn’t know any of that info about I-Bonds. It does sounds like a decent emergency fund option, as Ashley pointed out — if you have to withdraw for a real emergency, you’re not going to cry about losing 3 months interest.

  21. Love your point about not losing money and fighting off the inflation erosion! How do you find all these alternatives?

  22. I totally forgot about I-bonds so I’m glad I stumbled on this article again. I’m going to ask my advisor if he has any recommendations on I-bonds as I’m trying to invest some more money. Just doesn’t make sense to hold cash these days!

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