The Physician Philosopher Podcast
TPP 79: Bonds, I Bonds. Is it Worth the Hype?
Unless you have been living under a financial rock, you have probably heard about investing in I Bonds recently. It seems to be all the rage right now, but is it worth it? As you know there are different types of investments available to you, and bonds are one of them. There are also a lot of different types of bonds available, but I Bonds have been what everybody has been talking about lately. Are they just another financial gimmick?
Types of Bonds
When you are loaning money, and you get paid back with interest, it is considered a bond. There are loans to the federal government called federal and treasury bonds, loans to the state which are different depending on the state, and corporate bonds are loaned to a company. Junk bonds are usually a high-risk corporate bonds. Most people have a diverse portfolio of stocks and bonds because a bond normally has a lower profit rate than stock investments.
What is an I Bond?
I Bonds are inflation protected bonds that are backed by the federal government. But why is there suddenly so much hype about these bonds? Being inflation protected means that the interest rate rises as the Consumer Price Index (CPI) raises. With inflation increasing, the interest rates on these I Bonds is increasing. In a 6-month period from 2021 to 2022 there was $11 Billion invested in I Bonds. The 6 months prior to that there was only $1 Billion invested. This is a huge increase because the interest rates have increased so much.
With an I Bond, the interest amount changes every six months. This interest amount is the amount that the government is going to pay you back as profit for loaning the money to them. If you invested $100 and the interest rate was 1% a few years ago, you would get $1 on every hundred you invested. Because of inflation, the new rates have been between eight to nine percent, which brings your profit up to $8 to $9 on each $100 invested. People are logging into their stock accounts and seeing everything dipping down. This gets them thinking that they are missing out on this great investment option with a higher return.
FOMO- Fear of Missing Out
That brings us to our next topic, the fear of missing out (FOMO). Today’s thought is that the fear of missing out often drives many financial decisions. We have all been there! Lisha has been in a situation where she was being responsible and paying down credit card debt while she watched her friends go shopping with their stimulus check. She even rented an expensive apartment because she was missing out on that aspect of life even though it wasn’t manageable at the time.
I am a car guy, and I finally got my 2015 Porsche Boxster GTS. Some people think this is a horrible financial decision, but it’s tons of fun to drive! It also brings out FOMO for other people just like this I Bond has. Is it something you are really missing out on? While I was at my kids’ flag football game, I was getting asked about investing in these I Bonds. I wasn’t that familiar with them, so I had to do my research to find out what all the hype was about, and if it was worth adding it to my portfolio. Because it sounded really good, I had FOMO, but I didn’t have all the facts!
Are I Bonds For You?
The real question everybody is thinking is, “Are I Bonds right for me?” The answer isn’t really that cut and dry. It depends on your situation and expectations. Let’s look at it from a different angle. You invest $100 and that is now $109. It sounds great, but you are just keeping up with inflation and not really increasing your purchasing power. The fixed rate of an I Bond is zero percent. You are not getting anything extra except the inflation amount. This doesn’t necessarily mean it is wrong for you, so keep reading to see if you fit into a unique situation where it is beneficial!
Pros and Cons of I Bonds
There are some pros of I Bonds. First, they are extremely low risk bonds. If the government can’t pay them back, the government has failed, and we should be investing in food, water, guns, and ammunition instead of bonds! They are guaranteed right now at 9.62% until November of this year. That is a good rate to get in on. Lastly, I Bonds are state income tax free.
There are some less than appealing facts about I Bonds that may be a deal breaker for you. You might not have to pay state income taxes, but you do have to pay federal taxes. You will be taxed at your marginal federal tax rate. Because you invested directly with the federal government and treasury, you will pay those taxes at the back end. Personally, my marginal tax rate is well above 30 percent, so I would lose a 3rd of the interest I would have earned.
The next issue is liquidity. You are not allowed to touch your money for a year. If you take it out before five years, you will lose the last three months of your interest rate. There is a cap on the amount of money you can invest. The maximum amount is $10,000, but you can add in an additional $5000 if you get a tax refund. You can also do an additional $10,000 if you have an EIN number. To me, investing $10,000 into my portfolio isn’t going to move the needle much. The overall effect is minimal, and the website isn’t user friendly either.
When Should You Get an I Bond?
There are a few situations where an I Bond would be beneficial. Let’s say that you are saving up for a down payment for a house and you were planning on saving it in cash for a few years. If you invest in an I Bond your money would be growing instead of just sitting there. If you are saving up for anything that is in that middle ground, such as a house, car, etc…, an I Bond could work well for you. It will increase with inflation and has a guaranteed return that is backed by the federal government.
When you are reviewing your options, be sure that you are not investing due to FOMO. Know the facts and weigh the pros and cons. Personal finance is personal, and in your situation, an I Bond might make sense if you are saving for at least 12 months. Keep in mind that this is not a good option for an emergency fund or for long-term investing.
If you are looking to learn more about your personal finance live with me and Lisha, Medical Degree Financial University (MDFU) is opening up in June and we would love to see you there! MDFU will have live personal finance lectures from Lisha and I, on-demand courses on money, entrepreneurship, and more. We will be inviting guest speakers and there will be a monthly career coaching call for those who want that experience. Visit MDFU to learn more and join the waitlist!
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