Why Savings Bonds Are Your Best Hedge Against Inflation

Savings bonds
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With many of the world's financial markets reacting negatively to inflation, what is a good long-term investment for a beginning investor? For many investors, especially military members, savings bonds may be a surprise answer.

Did you know that savings bonds are currently paying 9.62% interest? That certainly is a much better rate than most banks and credit unions will offer; and unlike stocks, crypto, non-fungible tokens (NFTs) or the latest investment fad, savings bonds will never lose their value.

While savings bonds are not necessarily a good short-term investment, they can be an excellent choice for those seeking a safe long-term investment for retirement, saving for your children's or grandchildren's future, or just a safe and secure place to invest.

What Are Savings Bonds?

Savings bonds are issued by the U.S. Treasury and are a low-risk, government-backed investment. Savings bonds are exempt from state and local income taxes and may be federally tax free if used for education or in other situations.

The treasury currently issues two types of bonds: Series EE and series I.

Series EE bonds are similar to the savings bonds that have been around since World War II; they offer a fixed interest rate that changes every six months. Currently, EE bonds are paying an annual interest rate of 0.10%; however, after 20 years, the bond is guaranteed to at least double in value.The government will make a one-time adjustment to your investment to fulfill this guarantee.

Series I bonds, which were introduced in 1998, have an interest rate that follows the Consumer Price Index and adjusts every six months. The Consumer Price Index measures the cost of goods and services and reflects the inflation rate. Currently, series I bonds are paying an interest rate of 9.62%, that rate may change on Oct. 1, depending on current inflation trends..

Series I bonds that were purchased in 1998 have had their interest rate adjusted over the years so they are currently giving investors a 13.18% rate of return. That's not too shabby, especially when you look at the tax considerations and the fact that the money you invest in savings bonds, as well as the interest rate, are guaranteed by the federal government.

That interest rate rivals the Thrift Savings Plan (TSP) C Fund, which tracks the Standard & Poor's 500 (S&P 500) Index, a mix of the stocks of 500 large to medium-sized U.S. companies. While the C Fund returned an average of 13.08% over 10 years, the same C Fund has suffered a loss of 16.15% in value in the last 12 months.

Savings bonds will never lose their value. That is what makes them an attractive investment for long-term goals -- such as college savings, retirement or a nest egg for your children -- or when you don't need the money immediately, but you don't want to lose it all, either. Investing just $25 to $50 per week in savings bonds for your children can give them a nice chunk of change when they are starting out in life, or for other expenses

Savings bonds must be held for at least 12 months, with lower interest rates being paid on bonds that are less than five years old. There is a minimum investment of $25 and a maximum annual investment limit of $10,000 per person. Bonds are guaranteed to pay interest for 30 years. You can purchase bonds for anyone, as long as they have a Social Security number.

How to Buy Savings Bonds

You can buy savings bonds through allotments of your active-duty or retired pay; you can also purchase them directly online or with your federal income tax refund. You must create an account with TreasuryDirect, the U.S. Treasury's website, before you can make any purchases. See your payroll office or visit MyPay for more information.

So, if you want a potential tax-free, inflation-secure investment, series I savings bonds are a strategy to consider.

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