With newspaper headlines sounding a constant drumbeat of financial bad news -- recession, inflation and rising unemployment -- you might think it's time to put some cash in a supersafe investment. I savings bonds are meant to offer protection against inflation. And at a rate of 4.84%, they would seem the perfect solution.
Not so fast. There's less to that attractive interest rate than meets the eye. I bonds' rate is composed of two elements: a fixed rate, which lasts for the life of the bond, and a six-month rate, which reflects the current rate of inflation.
All of that current 4.84% interest rate, which lasts until November 1, represents inflation. The fixed rate is now 0% for 30 years. So if the rate of inflation falls off, so will your return. Greg McBride, of Bankrate.com, warns that savers should "focus on the fixed-return component. Right now, that return is nonexistent."
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To encourage savers to buy Treasury bills, notes and bonds, the government recently lowered the minimum investment to $100. At the same time, it cut the maximum annual I-bond amount that an individual can purchase from $30,000 to $5,000.
If you believe that the inflation rate (recently 5% annually) will keep rising and you want to protect a small portion of your funds against all risks, you could still choose to invest in I bonds. Just remember that if you cash them in within the first five years because you find a better opportunity elsewhere, you'll forfeit three months' interest.
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