Series I Bonds Earning Now 0%: Are They Still a Good Buy?

A few weeks ago, I wrote an article about the benefits of investing in Series I Savings Bonds. On May 1, as is customary, the inflation rate and fixed rate for Series I (and Series EE bonds) were reset. Series I Bonds bought during the next six months will earn 0.10% interest for the life of the bond. This is the new fixed rate. Because the country has been experiencing a negative inflation rate, Series I Bonds will also earn an inflation rate of 0% for the next six months. Further, current Series I Bond holders will earn 0% on the bonds that currently hold for at least the next six months; plus the fixed rate established when they first purchased their bonds. For example, if a person purchased bonds in December of 2007, they will earn a 1.2% fixed rate-the fixed rate at that time, and a 0% inflation rate for the next six months.

These new rates seem like a good argument against buying Series I Bonds, whether you are considering purchasing them for the first time or are already purchasing them periodically through payroll deduction. Depending on your individual financial circumstances, it may be. Series I Bonds are best for the small investor with a time horizon of one to ten years. If you have a small amount to invest, an amount less than $500 dollars (the minimum amount required to open some CD accounts), or if you can only afford to contribute small amounts from each paycheck, I Bonds are probably still a good bet for you.

First, while you'll only be earning 0.10% on your money until November, keep in mind that many large banks, like Capital One, offer this much interest or less for savings account holders with low balances. Further, savings accounts are also often subject to monthly maintenance fees if you don't have a certain balance. You won't have to worry about monthly charges with Series I Bonds.

Second, when inflation begins to rise, you'll accrue 0.10% PLUS the bond's new inflation rate. And it's a sure thing that prices will begin a sustained increase as the economy rebounds. Depending on how expensive prices become, you could earn a quiet competitive interest rate over the next few years. Remember, bonds bought between November 1, 2008 and May 1, 2008 earned 5.64%. Where else can you earn that kind of interest on $50 dollars?

Third, Series I Bonds are still ultra-safe. They are issued and backed by the United States. You won't have to worry about losing your principal. And lastly, you can still use Series I Bonds for tuition expenses without incurring tax liabilities on your gain.

So bottom line, don't let the headlines scare you. If you're a low income investor with modest financial goals and a midterm horizon, Series I Savings Bonds are still a good buy.