Dear Reader,

Those of us out in the real world, buying gasoline, bacon, Christmas gifts, and renting homes, understand that inflation is real and probably higher than the official government inflation number.

However, interest rates on fixed-income investments such as Treasury bonds and CDs remain very low.

One exception is the U.S. government’s inflation-linked savings bonds, which currently pay over 7%. And that rate will go higher if the rate of inflation goes even higher.

Specifically, I have the Series I Savings Bonds in mind. They currently yield 7.12%, and are the exception and an alternative to low-interest rates.

You purchase Series I Bonds through an account on the Treasury Direct website. Here are the features of I Savings Bonds:

• Minimum purchase: $25. Maximum: $10,000 per year.
• The rate you earn is a combination of a fixed rate and an inflation rate.
• The fixed rate stays the same for the life of the bond.
• The inflation rate resets every six months on May 1 and November 1.
• The rate on your bond changes every six months from the date of purchase. For example, if you bought an I Bond on December 15, the rate on that bond would change on June 1. See table below.
• Interest compounds every six months.
• Savings Bond interest is exempt from state income tax.

Here are some factors to consider before investing in Series I Savings Bonds.

• You cannot redeem a bond for at least 12 months after purchase.
• If you redeem a bond before five years, you will be charged a penalty equal to three months of interest.
• Interest only compounds to the bond’s value. You cannot have the interest paid out as earned.
• If the official inflation rate declines, the interest rate on your bonds will decrease.
• The current fixed rate portion of the rate is 0.0%. Hypothetically, there could be periods where your bonds earn 0% interest. Probably a good time to take that three-month interest penalty.
• The $10,000 per year purchase cap limits how much of the I Bonds high interest rate money you can earn.

In conclusion, Series I Savings Bonds offer a safe, high-yield hedge against inflation at the current level, or even higher. These bonds would make great gifts for someone you want to help save money. But be aware: Series I Bonds tie up your money and reinvestment is the only option for earned interest.

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