This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, May 12, 2009

0% return?!?! - Update on Series I Savings Bonds

Posted by Paul

(for more detailed info on savings bonds see previous posts on savings bonds: Savings Bonds 8/27/07 and Savings Bonds Revisited 8/22/08)

Those of us who have purchased or who have been following the Series I savings bond got to see some history as the interest rate for a new Series I bond went to 0% for the first time since the I Bond was created over 10 years ago.

What happened? Well the quick summary is that the I bond return is tied to the inflation rate, and for the first time since the bond was created the inflation rate (which is published twice a year in November and May) was negative (specifically -2.78%). If you do the math, this means that the return rate of your bond is negative (even if you bought I bonds when their rate was highest back in 2000 the calculation results in a negative number). Luckily it is made clear that when the rate of the bond goes below 0 it just gets set to 0.

So what does this all mean? Well there is a whole article talking about it here:

Yikes! Series I Savings Bonds paying 0.0%

To summarize some specific points from the article:
"That means your money is still safe from inflation, but you’re getting the same return you’d get by burying it in a coffee can in the back yard."

The article managed to find a small silver lining in all this:
"If you do decide to dump your Series I bonds, you’re in luck. Normally, if you sell a bond less than five years after you bought it, you have to pay a penalty equal to three months interest. Since you’re getting no interest, you’ll owe no penalty."(Hooray?)

For me, I'm just going to hold onto my bonds and see what happens when the rates reset again in six months.

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