How to Hedge Against Inflation Risk-Free
With inflation growing at the fastest pace since 1982 and surged 6.8% in November year-over-year. Some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded, but there is a way. The U.S. Department of the Treasury is paying a 7.12% annual rate on I Bonds as of November 1, 2021 through April 30, 2022. After that, the interest will float, depending on inflation. To put into perspective, Chase pays 0.01% on their savings account. That’s a 712% difference.
Every American can buy up to $10,000 I Bonds per year. If you’re married, $20,000. Thus, one can buy up to $20,000 worth of I Bonds before the end of the year and up to $20,000 between January 1 to April 30, 2022, locking in a 7.12% interest rate on up to $40,0000 for 6 months.
It’s important to note, you can’t cash I Bonds out before 1 year. If you cash them out after 1 year but before 5 years, you will have to forfeit the last 3 months of interest. Cashing out after 5 years, you get to keep it all. Interest earned is state and/or local income tax free, but you will owe Federal income tax once you cash out. Another benefit of I Bonds is that they are not bought and sold in the open market. You’re dealing directly with the Federal Government. Meaning the principal value of your investment won’t fluctuate with the market forces of supply and demand. Inflation rising or dropping will determine if you get paid more or less on your investment after April 30, 2022. The Federal Government guarantees your rate will never go below 0% and your principal will never go down. Hence the hedge against inflation.
Why it matters: This is an anomaly that won’t last forever. The average return for the stock market is about 8% and the cap rate on real estate is 4%. We might as well relax and lock in the free guaranteed return of 7.12% without having to do any work, deal with difficult tenants, or worry about the market nosediving. This is the second-highest rate ever offered on I Bonds according to the U.S. Department of the Treasury.
How to Buy I Bonds:
Have a Social Security Number and be a U.S. citizen, whether you live in the U.S. or abroad, U.S. resident, or civilian employee of the U.S. no matter where you live.
Open an Individual Account at TreasuryDirect.gov.
Click the BuyDirect tab.
Select Savings Bonds Series I.
Click Add New Registration and select Sole Owner.
Enter the amount you want to purchase (Minimum $25 and up to $10,000 per year).
Schedule single purchase for a date a few days before the end of the year to make sure it processes on time and click Submit.
Relax and make money at a rate faster than inflation while you sleep.