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Where to invest your emergency savings
Something that pays zero percent interest may not seem a good deal, but Series I bonds, a type of Federal savings bond for individual investors, can sometimes be a peculiar exception.
This month, the Treasury department kept the interest rate of I bonds at 0 percent, the same level as in the previous 12 months. Over the past six months, owners of the November 2014 I bonds earned no interest on their I bonds.
But don’t click the back button yet: There’s the potential for some real upside for I Bonds over the next six months. The CPI is virtually guaranteed to rise signifcantly between now and November 2015, as gasoline prices rebound from $2 per gallon lows this winter.
I bonds pay two types of interest to their owners. One is a fixed rate that the Treasury Department announces every May and November. In addition, all I bonds are also indexed to inflation, as measured by the Consumer Price Index (specifically, the Consumer Price Index for all Urban Consumers, or CPI-U). If the CPI is greater than zero, the bond owner also receives that percentage increase as interest. The total interest the bond owner receives is a combination of both rates. So although November 2014 I bond owners got a bit of a raw deal this May, they, as well as all other I bond owners, may be rewarded as the CPI index goes up.
Find out more about different strategies to amass cash for emergencies.
Individuals are limited to purchasing no more than $10,000 in I bonds each calendar year, so you may not be able to park your entire savings in them. But that limit is more than sufficient for the emergency savings needs of many households. In the event you need to redeem the I bonds before 5 years of purchase, you lose only 3 months of interest.
Another advantage of I bonds is that any interest paid are free from state taxes. (And if you use the proceeds for qualified education expenses, they can be free from Federal tax as well). The only way to receive I bonds in the old-fashioned paper form is by purchasing them with your Federal tax refund. Otherwise, you’ll need to set up a TreasuryDirect account to keep tabs on your balance and savings bond values.
-—Chris Horymski
Individuals are limited to purchasing no more than $10,000 in I bonds each calendar year, so you may not be able to park your entire savings there. But that limit is more than sufficient for the emergency savings needs of most households. In the event you need to redeem the I bonds before 5 years of purchase, you forfeit 3 months of interest.
Individuals are limited to purchasing no more than $10,000 in I bonds each calendar year, so you may not be able to park your entire savings there. But that limit is more than sufficient for the emergency savings needs of most households. In the event you need to redeem the I bonds before 5 years of purchase, you forfeit 3 months of interest.
Consumer Reports has no relationship with any advertisers on this website. Copyright © 2006-2015 Consumers Union of U.S.
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