As everyday costs rise, many savers may be looking for ways to inflation-proof their wallets – including their savings.
The latest Consumer Price Index paints a dire picture for Americans at home as prices continue to rise. According to the most recent data from the Bureau of Labor Statistics, prices were 3.8% higher than last year – the largest annual increase in three years – and increased by 0.6% monthly, mainly driven by rising energy costs.
Another way to deal with inflation: explore other ways to save.
Read more: 6 ways investors and savers can stay ahead of inflation
What is a series I bond?
Series I bonds are government-backed savings bonds that are linked to inflation. Each bond is issued at face value with a 30-year final maturity, consisting of a 20-year original maturity period immediately followed by a 10-year maturity period.
A composite bond rating, or income rating, has a two-part structure: a fixed rate and an inflation rate. The fixed rate stays the same throughout the term of your bond, while the inflation rate can change every six months.
Savings bonds earn interest monthly, and that interest is compounded twice a year.
Another advantage of these bonds is that, while they are subject to federal income tax, they are exempt from state and local income taxes. Savers can choose whether to report the income each year or report all of their income at once when they redeem their bond. Additionally, if you choose to use your money for qualified higher education expenses, you may not need to deduct any tax on those earnings.
Series I savings bonds issued between May 1, 2026, and Oct. 31, 2026, currently offering a compound rate of 4.26%, with a fixed rate of 0.90%.
Savers can purchase I-bonds electronically for as little as $25, up to $10,000 per calendar year, through a TreasuryDirect account.
Read more: How to protect your savings from inflation
Case to buy now
Series I bonds can be an attractive savings vehicle in times of inflation because the compound rate rises with inflation, giving savers a built-in hedge against rising prices.
These bonds currently offer higher yields than the national average for other savings vehicles. The national average rate for a regular savings account is just 0.38%. Money market accounts and certificates of deposit (CDs) offer slightly higher national average rates at 0.57% for money market accounts and 1.53% for a 12-month CD, but this is still significantly lower than the average Series I bond yield.
If the rate of inflation continues to rise, that could translate into even higher returns for bondholders. In 2022, Series I bonds reach rates as high as 9.62%. Unlike your average savings account or CD, investing in this type of bond can reduce the cost of inflation. However, this can be a double-edged sword. Because the rate component is variable and linked to current inflation, the rate can drop significantly – sometimes to zero – meaning your return may end up being lower than other investments.
See also: The most advanced savings accounts again Great CD prices
Disadvantages of Series I bonds
These commitments are not without limitations, and it is worth understanding the rules and restrictions before committing.
These bonds come with a mandatory maturity. This means that you cannot use the I bond for at least 12 months after the purchase date. If there is a chance you will need to get into those funds early, I bonds are not a good fit.
After that holding period is over, you can access your money, but doing so within the first five years of holding your bond will incur a three-month interest penalty.
There are also purchase restrictions to keep in mind. You can only buy up to $10,000 in electronic I bonds. Before Jan. 1, 2025, you can buy an additional $5,000 in paper bonds with your tax return for a maximum aggregate amount of $15,000 per year, but this option has been discontinued.
How do series I bonds compare to HYSAs, and who should get them?
Series I bonds and HYSAs both offer above-average savings rates, but they differ greatly in terms of features and capabilities. If you’re the type of saver who values liquidity and high deposits, a high-yield savings account may be a better option. The trade-off is that these accounts come with monthly payments, and interest rates are not fixed and can fluctuate at times.
Savers who value fixed rates and have long-term savings goals that will not require access to their funds in the near term can benefit from the stability of a Series I bond; however, the maximum limit of $10,000 can be a hindrance if you are aiming to save a lot of money for a more expensive financial goal.
Ultimately, both savings options can be beneficial and should be considered with rising inflation.
Read more: Bond vs. high-yield savings account: Which is better than inflation?
