Tuesday, April 21, 2009

Purchasing My Next 6 Month’s Worth of I-Bonds Before 4/30/09

(Warning: This post contains a lot of geek-talk about I-Bonds and interest rates. Before you read this post, I recommend that you read about how I-Series bonds' rates are set and re-set at MyMoneyBlog. Jonathan lays out the official formula and a step-by-step explanation how to estimate and calculate current and future interest rates on your I-Bonds.)

Update: I've been told that all I-Series bonds rate will re-set at 5/1/09, not on a 6-month rolling-basis from the date of purchase. There seems to be contradictory opinions about this and I don't know the answer since I'm new in the savings bond game. But I'll find out 5/1/09 and I'll write an updated post as to whether all of my savings bonds have re-set or not.

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Since last October, I’ve been purchasing $25 worth of I-Series Savings Bonds every month. Depending upon when I buy the bonds, each bond carries different interest rates with different re-set dates.

Since I’ve only recently started purchasing I-bonds, it hasn’t been difficult to keep track of the interest I’ve been accruing. However, now that it's been over 6 months since my first purchase, most of my I-bonds will start re-setting.

After nearly over-working my math-challenged brain, I’ve determined that:

  • The $25 I-bond that I purchased in October 2008 accrued 4.83% interest until 3/31/09. It started accruing 4.92% APR on 4/1/09 and will continue to do so until 9/30/09. It will accrue 0% for the following 6 months starting 10/1/09.

  • The I-bonds I purchased between 11/1/08 and 4/30/09 (total $150 over 6 months) are currently accruing 5.64% interest for the first 6 months from the first day of the month I purchased them. The interest rate on the bond purchased in November ’08 will re-set to 0% on 5/1/09 for 6 months. The savings bond I purchased in December ’08 will start accruing 0% on 6/1/09, so on and so forth.


Confused? It confused the heck out of me too! I'm the type of person who can only comprehend math problems visually and not conceptually, so I decided to create a spreadsheet that helps me keep track of the past interest rates as well as to "predict" what the future interest rates will be.

Although the fixed rate for 5/1/09 hasn't been announced yet, based upon the most recent March CPI data announced, it looks like savings bonds purchased between 5/1/09-10/31/09 will accrue 0% interest. (Bummer.) In that case, I’m better off putting my money into an online savings account.

In the alternative, I can just buy the bonds I intend to purchase between 5/1/09-10/31/09 (i.e., $25/month x 6 months = $150 total) on or before 4/30/09.

If I do this, I can accrue 5.64% interest until 10/31/09 and accrue 0% 6 months thereafter. That will give me a net interest rate of 2.75%, which is much higher than what I’m currently getting in any of my savings accounts. If I take into account the fact that the interest on the I-Bond won’t be taxed by the state, I’ve estimated the net effective interest rate will be around 3.00% for the next 12 months. (Note: I haven’t taken into account the 3 month penalty for selling the I-Bonds prior to the 5-year holding period since I don’t intend to cash them out before then. After all, the I-Bonds are an important part of my long-term savings strategy.)

The risk I take in buying the I-Bonds rather than putting the $150 into my savings is that if the current deflationary economy continues, my I-Bonds will continue to accrue 0%. But what the heck, it’s only $150 and it's not like I'm wasting it, right? And besides, if hyper-inflation occurs in the future, these puppies will have a n-i-i-c-e interest rates then. :-D

7 comments:

Miss M said...

Yeah the pending rate drop is part of why I'm giving up snowflaking with them, the money will be better put towards debt. I believe all bond rates reset on May 1, even those bought on April 30. I don't think it's fixed for 6 months, but you'll continue to get the 0.7% for life whereas new bonds issued starting may 1 will probably only pay 0% fixed for life + inflation.

Shtinkykat said...

Uh-oh. I thought they re-set on a rolling basis! Shiite....

Anonymous said...

How do you purchase bonds?

Shtinkykat said...

@ Anon: The best way to buy savings bonds is through TreasuryDirect. But if you're interested in paper bonds, here's instructions on how to buy paper bonds.

Anonymous said...

Thanks!

Ms. MoneyChat said...

what the heck, why is the rate going to be 0%? I have a $25 i-bond that i purchased several years ago. i need to logon to the treasury direct website and see how it held up. LOL. i purchased it before i really had a "plan." once i crafted a plan, the bonds didn't fit.

Shtinkykat said...

@ Ms. MoneyChat: As Miss M points out, I could be completely wrong about my understanding of how I-Bonds rates are set.

But this is certain: the I-Bond's interest rate is a "composite rate" that consists of a fixed rate component and a variable rate component. The variable rate is based upon the past 6 month consumer price index. The most recent variable rate will be a negative % due to the deflationary economy.
Here's what's unclear: Miss M thinks that the lowest rate that an I-Bond will have is its fixed rate. But it was my understanding that if the variable rate is negative and is significantly less than the fixed rate, the lowest interest that the I-Bond will yield will be 0% (i.e., you will never get a negative return on your bonds in a deflationary economy).
I'll find out for sure on 5/1 or so. I'll probably do a "I was dead-wrong" follow up post. :-D