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.

~~~

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