I’m always open to learning about new investment opportunities, and I’m always looking for ways to better maximize my money. However I’m also always a bit skeptical and even if it’s a good investment idea I try to look at my investment portfolio holistically as I’ve been trying to limit the amount of places I have my money. If I’m only getting a marginally better return is it really worth the hassle of setting up a new account, maintaining it and figuring out taxes?

One newer type of investment that has become quite popular is actually a pretty old and boring type of investment – a bond. I have memories of friends and family buying US Treasury Bonds for me when I was little – meant to be something I saved up for college. I remember the hassle years later trying to find them all and redeem them but they worked! As our world and economy continue to shift, savings bonds are suddenly coming back into fashion! I’ve had more friends talk about investing in them and have seen more news articles popping up about them. Let’s dive in and see why this old and boring investment might actually be worthwhile.

What they are

Although this is a bit of a slippery slope in terms of diving down a deep rabbit hole of monetary theory but, generally speaking, the US Treasury manages the budget for the US government, brings in tax revenue (via the IRS), and this is where bills are paid out of. From time to time (or all the time over the past decades), the US government doesn’t have enough to pay it’s bills right now so it borrows money to do so. The US Treasury issues bonds essentially I.O.U.s to get money now which will be paid back at a later date for more than was borrowed. Simple enough right?

Bonds have been a part of our government and economy dating back to even the Civil War, definitely in World War I and II and then in 1935, President FDR signed into law the creation of the US Savings Bond (as opposed to a war bond) war born. So, by purchasing US Treasury Bonds, you are lending the US government money to keep running today for a positive return on your money in the future!

How they work

Now there are different types of US government bonds out there but to buy the Series I bonds (which are the more logical choice in my opinion) you need to go through the official US Treasury website. I’ve read the process for signing up and managing your bonds a bit like going to the DMV so take that for what it’s worth. But it seems easy enough – you put in your basic demographic information, hook up your bank and start buying. You can only buy up to $10,000/year of them.

The minimum holding time is 1 year, and no getting your money back before then. After that if you hold it for less than 5 years you forfeit the last 3 months worth of interest that you’ve earned. The maximum time you can hold the is 30 years, at which point they stop earning interest. The good news is that your money is virtually risk-free, aside from the failure of the US government which if that happened we’d have a lot bigger problems on our hands. These bonds are also exempt from state and local tax, but you will need to pay federal income tax on them.

The interest rate consists of a fixed interest rate and a variable one – the variable piece looks at the CPI (consumer price index) and makes sure it’s tracking. So it’s almost like a hedge against inflation to buy these bonds – you’ll at least be making a return > inflation. The interest rate will fluctuate every 6 months depending on inflation. Honestly the interest calculation is pretty complex (my eyes glossed over while reading it) but instead I found this helpful chart, which tracked historical rates. Over the past decade they’ve been paying a pretty consistent 8-10% annual return.

Why we’re talking about them now

Right? How did I miss these and why are more bloggers and financial news sites talking about them? It’s anybody’s guess but I would imagine because a) bonds are pretty uncool and boring and b) previously with the stock market roaring like it was, it just made more sense to put money into stocks.

However now as the economy cools down and inflation continues to affect us, I think that many investors are looking for alternatives. A Series I treasury bond offers a lot of security but also a guaranteed return that will beat (or at least keep up with) inflation. With stocks negative for the year, real estate slowing down and my ‘high yield’ savings account only paying 1.2%, maybe a risk free 9% is worth looking into!

Pros and cons

Before making a decision I do like to think through the pros and cons:

Pros

• Your money is risk free from loss
• The variable rate is based on the consumer price index so you’ll be keeping up with inflation
• It’s a great return (9% right now)

Cons

• You can only put up to $10,000 into these so you’ll still need to invest elsewhere
• The minimum term is 1 year and if you wish to avoid a penalty it’s 5 years. That might be a long time to lock up your money
• I suppose that when times are good (i.e. the stock market doing 20%+) that this investment wouldn’t be the best place to park your money

To be honest there definitely seem to be more pros than cons!

Will I invest?

Yes, but probably not right away. My big word of 2022 is FOCUS and this feels like yet another thing. I am really trying to get better at managing my money by limiting the number of places I put it. On a $10,000 investment I’m forgoing $900 so it’s not negligible but also something to consider when other investments are losing money. Also to be honest our budget is pretty tight right now and we don’t find ourselves with a surplus of much extra money to invest.

It doesn’t look like this good rate is going away anytime soon so I think I will put this on my ‘to-do’ list, maybe for next year!