Any Interest?

Kenyon Sayler

REMEMBER THE OLD joke about the efficient markets theory? An economics professor and a student are walking across campus, when the student says, “Look, there’s a $100 bill on the path,” to which the professor replies, “That can’t be true, because somebody would’ve already picked it up.”

I’ve been thinking about that joke not because of the efficient markets theory, but because I’m amazed at how many smart people walk by a $100 bill every day. These folks have their emergency savings in an online bank, which right now might pay 0.5% interest. Many brick-and-mortar banks are paying one tenth that amount. Meanwhile, Series I savings bonds (don’t roll your eyes) are currently offering 1.68%. That’s an extra $118 in annual interest on a $10,000 emergency fund.

Friends will debate which exchange-traded fund is better based on a one basis point (0.01%) difference in fees. You’d need more than $1 million invested for one basis point to amount to $118—and yet could make that much extra simply by moving $10,000 from your online bank to an I savings bond.

For those not familiar with I bonds, they’re a type of U.S. savings bond that’s guaranteed to keep up with inflation. The Treasury Department introduced the I bond in 1998. When you buy one, you get a fixed rate that’s set for the life of the bonds. Currently, that fixed rate is zero, which doesn’t sound very appealing.

But on top of that fixed rate, you get inflation protection. To compensate for inflation, I bond holders receive a semi-annual interest rate that changes twice a year. Currently, it’s 0.84%. If you multiply that semi-annual interest rate by two and then add it to the fixed rate, you get the annual interest rate, which today is 1.68%. Like all Treasury instruments, I bonds are backed by the full faith and credit of the U.S. government.

The interest on I bonds is state tax-free. The interest can also be federal tax-free if you cash in the bond in the same year that you pay for higher education, though income restrictions apply.

What are the downsides? First, you have to hold an I bond for 12 months before you can redeem it, so you don’t want to invest all of your emergency savings right away and, instead, you should buy your I bonds gradually. If you redeem your bonds before five years have passed, you forfeit three months of interest.

Second, you’re limited in how much you can invest in I bonds. Each year, you’re allowed to directly purchase no more than $10,000 of I bonds. If you’re due a refund on your federal income taxes, you can also use that money to purchase an I bond, but only up to $5,000. The upshot: An individual can purchase $15,000 of I bonds per year, while a married couple is limited to $25,000, comprised of $10,000 each, plus up to $5,000 using their income tax refund.

The third issue isn’t really a downside, but rather something you have to get used to. Your broker can’t sell you I bonds. You can’t buy them on a secondary market. You can’t buy them from a bank (though your local bank may cash in your savings bonds for you). Instead, the only way to purchase I bonds are either with your tax refund or directly from the Treasury through

The website is user friendly. In about 10 minutes, you can set up an account, link it to a bank account and schedule the purchase of your first I bond. Result: You might spend 10 minutes and make $118 in extra interest.

Kenyon Sayler is a mechanical engineer at an international industrial firm. He and his wife Lisa are extraordinarily proud of their two adult sons. He enjoys walking his dog, traveling, reading and gardening. His previous article was Home Free.

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