Two Ways for Savers to Beat Low Interest Rates

 

Savers are currently earning dismal interest rates on their money accounts and CDs. There are two options to get annual yields of over 3.5% for 20 years and over 9% for at least six months. 

Series EE Savings Bonds offer by Treasury Direct are currently yielding only 0.10%. However, what is not commonly known is that the Treasury promises that your bond will be worth twice what you paid for it if it is held for twenty years.

To estimate what interest rate this doubling over twenty years is equivalent to, one can use the Rule of 72. Divide 72 by 20 yields an approximate interest rate of 3.6%. A great improvement for patient investors willing to hold on to their bonds for twenty years.

The exact interest rate is given by 

2 = (1+i)²⁰

Solving for i, 

i = 2^1/20 – 1 = 0.0353 or 3.53%

In this example, the Rule of 72, provides a good approximation.

The other good offer from the US Treasury is the purchase of I bonds. These bonds have an interest rate that is inflation adjusted every six months. Since the United States has recently experienced a period of higher-than-normal inflation, the interest rate being offered through April 2022 is 7.12%. Next spring, the rate will be adjusted again. I know of no other low-risk investments with 7%+ returns. Investors can buy $10,000 per calendar year. 

Update 5/2/2022 - The treasury announced the I bond rate for the next six months will be 9.62%: Individual - Buying Series I Savings Bonds (treasurydirect.gov)

For information on the rates, Go to: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm#irate

The interest rate was recently adjusted earlier this week and is adjusted, based on inflation, every 6 months (each May and November).

Each person can buy up to $15,000 each year:
Electronic: $10,000, total, each calendar year
Paper: $5,000, total, each calendar year

If you don't have an account already, set one up here: https://www.treasurydirect.gov/RS/UN-AccountCreate.do

Once you have account, you can buy the I-bonds online from Treasury Direct. Next year, you can also buy a paper I bond using your tax refund.

I bonds earn interest for 30 years unless you cash them first. You can cash them after one year. But if you cash them before five years, you lose the previous three months of interest. (For example, if you cash an I bond after 18 months, you get the first 15 months of interest.)