Podcast Episode - Suze School: Is It Time To Stop Buying I Bonds?
February 19, 2023
Listen to Podcast Episode:
On today’s podcast, Suze looks at what’s happening with the economy, with inflation and talks about what she thinks will happen with Series I Bonds.
Podcast Transcript:
00:00:28
Suze: February 19th 2023. Welcome everybody to the Women and Money Podcast as well as everybody smart enough to listen. Suze O here and KT and I are back on the island and we're so excited to be. So in fact,
00:00:50
Suze: I actually taped what it was like to land on this little island. Remember this island is only 2.5 miles long that we live on, a half a mile wide at its widest point
00:01:05
Suze: and the runway is 1995 ft. That's it. So no big planes at all. So we get on a little plane. The two of us, two pilots, we load it up with as much stuff as we can bring back because you have to bring everything back to be able to live here, to eat and do everything
00:01:26
Suze: and I wanted you to see what it was like flying over the water approaching the runway and landing. It's quite something.
00:01:37
Suze: So if you want to see that, check it out on the Women and Money community app that you can absolutely download on Apple Apps or Google Play. It's free. I post many things there that I don't post on instagram or anywhere else. I kind of like to keep it in the family.
00:01:58
Suze: Suze School today is going to answer the question about I bonds. What question is that Suze? The question is should we continue to invest in I bonds. So let's go back a little bit in time.
00:02:19
Suze: I was absolutely I bond crazy a few years ago because it was obvious that inflation was going up and up and up and when inflation goes up that is the time that you really want to buy Series I bonds because remember a Series I bond stands for inflation
00:02:48
Suze: And there are two parts to a Series I bond one is they give you an inflation rate that changes every six months every November and May that rate changes. But in I bond also has what's known as a fixed rate, a rate that never changes and I think the highest the fixed rate ever was...
00:03:16
Suze: Alright was back let's hope I get this right was back at about 2000 when it was at 3.6%. I started buying I bonds around then but my fixed rate was at 3%. So on that I bond that I purchased no matter what inflation did, I would always get minimum 3% on that bond.
00:03:44
Suze: As years went on,
00:03:47
Suze: I bond stopped giving fixed interest rates, they were at 0%. So I bonds because inflation was also very low. There were years that they didn't really give any interest whatsoever which is why you weren't interested most likely in buying them years ago then as inflation started to ramp up a few years ago
00:04:14
Suze: and started to go off the charts really.
00:04:18
Suze: We all got interested. Alright so as inflation was going up,
00:04:25
Suze: The interest was 7.1% then it went to 9.62% and now it's at 6.89%
00:04:37
Suze: When I say those percentages, those are annualized yields.
00:04:45
Suze: So you don't get that 9.62% for the entire year. You get it for a six-month period of time on an annualized basis. So you would divide that by two to be able to know exactly the interest rate you would get for that six months.
00:05:09
Suze: Now it's important to know that because as all of you know, but in case for those who don't, when you purchase an I bond that's issued by the United States government and you can only buy them on Treasury direct dot gov minimum is $25 and then you can buy them as an individual all the way up to $10,000. There are other ways though to buy additional
00:05:36
Suze: I bonds to get close to 30 or $35,000 a year into them. However, just let's stay simplistic for this Suze School. When you buy an I bond for the very first year, you cannot sell it no matter what happens to you. They are locked years two through five.
00:06:01
Suze: There is a three month interest penalty if you happen to sell.
00:06:07
Suze: After five years you can sell any time you want, the official name is called, you redeem them and you can redeem any amount of money you want. If you happen to put in $10,000 and you only want to redeem 2000 you can do so. That's essentially how Series I bonds work. Also the interest on a Series I bonds is tax deferred.
00:06:37
Suze: So when you do redeem them, that's when the majority of you will pay taxes on that money as ordinary income. However,
00:06:47
Suze: you also have the choice if you're going to keep your I bonds for really long term to pay the taxes annually anyway,
00:06:57
Suze: even though you didn't get the interest because, like me and it was truthfully, I think a mistake I have to tell you I've had I bonds for so long now I have a serious amount of money in there. Some that are over 20 years old and when they do cash out, because they're only good for 30 years. So when I do redeem them
00:07:23
Suze: they will have a whole lot of interest that I will owe on that.
00:07:28
Suze: So should I have paid income taxes on it as I was going on? In retrospect, I probably should have. But hey, what to do? I'm still happy I purchased them.
00:07:40
Suze: So now the question becomes, what's happening in the economy, what's happening with interest rates and therefore what do I think is going to happen with Series I bonds
00:07:58
Suze: Now as I said, they changed the interest rate every May and every November if you happen to have purchased an I bond November 1st or after all the way up to April 30th of this year. Your annualized interest rate will be 6.89%
00:08:22
Suze: But that 6.89%
00:08:26
Suze: is made up of .40% which is fixed.
00:08:34
Suze: So .40%
00:08:38
Suze: of that annualized yield
00:08:41
Suze: of 6.89%
00:08:45
Suze: will be with you for the rest of the time that you own this I bond. So 0.40%. Annualized is the least you will ever earn on the I bond that you purchased either November 1st or until April 30th of this year. Okay?
00:09:09
Suze: So that gave you an annualized yield,
00:09:13
Suze: like I said of 6.89%.
00:09:17
Suze: So half of that is what you will actually be earning for the six months that you own that I bond.
00:09:29
Suze: wWhen you're six months is up. Whatever they reset the interest rate, May 1st at that will be your next annualized interest rate and you will get half of that and then you will be able to figure out what you've earned for the entire year.
00:09:51
Suze: Now the question becomes
00:09:55
Suze: for six months because let's just look at this for six months. And why do I say that? Because have I not been telling all of you that I only want you in
00:10:09
Suze: 3 to 6 months - either Treasury bills or certificates of deposits. If you live in a state that has high state income taxes. T bills are better for you. If you live in a state that your income tax is tax free, there is no state income tax, certificates of deposit can serve you just as well
00:10:37
Suze: For those of you who find it complicated to buy T bills. Then again, certificates of deposits will actually serve you better than just leaving your money in a savings account, especially given what interest rates are doing. And now that I brought up certificates of deposits, I just want to tell you very shortly here like we promised you
00:11:04
Suze: and hopefully that will be in a week or a little bit more than that. Three month and six month certificates of deposits will be available via Alliant Credit Union and we are doing everything we can to match the current three and six month Treasury Bill rate, which will mean
00:11:29
Suze: that most likely the interest rates on the three and six month certificates of deposits, that you're gonna be able to buy with absolutely no commission via alliance are going to be higher.
00:11:43
Suze: We'll see if that's true but higher than any other three and six month certificate of deposit that you can find anywhere. Check it out when it happens. And I think you are going to be so pleased when you see especially the rate on the six month certificate of deposit. I can't even tell you. So you might wanna just now go to my Alliant dot com,
00:12:13
Suze: to become a member of Alliant Credit Union, deposit some money, whatever you want. The minimum will be $1000 to buy these certificates of deposit So deposit any amount of money you want. However into the Ultimate Opportunity savings account that's currently giving 2.95%
00:12:31
Suze: and there are other offers with that as well, but get ready for hopefully next Sunday or a few days after that. But it is coming soon.
00:12:43
Suze: Now... I just got myself off track because I really didn't mean to go there. But anyway, the point that I was trying to make is that
00:12:54
Suze: I want you to stay short term. Now there may be other certificates of deposits that are out there for 11 months possibly giving you 5% or whatever. But given that I really believe that interest rates are going to continue up and they're going to continue up because inflation did not come in as low as the Feds wanted it to.
00:13:24
Suze: So therefore they're going to continue to raise the Fed funds rate probably to about 5% or more. And that means most likely interest rates on savings accounts, treasuries and certificates of deposits are going to continue to go up. So why lock yourself in at 5% for 11 months on a certificate of deposit?
00:13:49
Suze: When probably you're going to be able to keep fingers crossed, maybe lock yourself in for 5% on a six-month certificate of deposit or treasury bill
00:14:01
Suze: and then six months from there, maybe lock yourself into even a higher rate or maybe the three month will be even higher, just stick with three and six month maturities no matter what you're doing at this particular point in time.
00:14:22
Suze: So that's my advice to you there. Back to Series I bonds.
00:14:28
Suze: Boy... see what happens when you go to Florida and you go to a Jimmy Buffett concert, you're like in Margaritaville, you're all over the place. But I know you can follow me Series I bonds.
00:14:41
Suze: I don't love them as much as I used to and here is the reason why. See if you can follow me on this one.
00:14:54
Suze: Number one, your money has to be locked up for the first year. Okay, that's fine. When we were making 9.62, 7.1, even 6.89. I don't have that big of a problem with that.
00:15:09
Suze: However, since I don't exactly know what's going to happen in May,
00:15:15
Suze: I do know that inflation is coming down.
00:15:21
Suze: So I doubt highly that in May the renewal rate will be 6.89% or higher.
00:15:31
Suze: Alright, so let's just assume that the renewal rate starting May one is 5%.
00:15:41
Suze: That would mean for a six-month period of time you would only be getting 2.5%.
00:15:50
Suze: For the year.
00:15:52
Suze: you would have gotten for the first six months, 3.45% then you would have gotten 2.5%. So you would have averaged about 5.95%. Still fabulous if it's at 5%. That I don't have a problem with. But I do think as time goes on we're going to see the inflation rate go down.
00:16:20
Suze: And the only bad thing about Series I bonds is that you can't get at your money without a three month interest penalty for years two through five. So let's just stick to this example. Did you take out your little Suze notebooks and write this down? Let's just say
00:16:40
Suze: you need to take out your money if you're in the second year now, you made great money the first year great money. maybe even the second year. Maybe you're in the third year doesn't matter.
00:16:52
Suze: But you want to take out your money now
00:16:57
Suze: you will have to pay a three month interest penalty. Now in this particular situation,
00:17:04
Suze: if they're giving you 2.5%
00:17:10
Suze: on that six months. Three months penalty would be 1.25%. That's what it would be. So now you take your money out and what's happened is rather for this year then, that you earning 5.95%
00:17:32
Suze: With the penalty, you only earned 4.7%.
00:17:37
Suze: And I personally think, still a great interest rate, don't have a problem with that.
00:17:44
Suze: But I still think as time goes on
00:17:49
Suze: that if you had done a three month, six months, even a year, Treasury or certificate of deposit,
00:17:59
Suze: you probably would have come out even better in the long run as time goes on.
00:18:07
Suze: So what do I think? I think, hey, if you want to do another Series I bond for this year
00:18:15
Suze: and you want to take a chance as to where inflation may go, which is more likely down than up. And if you need that money, it's a three month interest penalty. Why not just do short term certificates of deposits and or Treasury bills depending on your situation,
00:18:37
Suze: knowing that you keep it in there for that three months, that six months. You're not locked in for a year. You're not locked in for five years essentially with a three month interest penalty as you are with Series I bonds, you can choose what you want to do.
00:18:56
Suze: So I think we are absolutely coming to the time where Series I bonds are not as attractive, long run because of their five year holding period as they once were. Now, if the interest rate that they were going to give you the inflation weight went down to zero
00:19:19
Suze: then okay. Like it was for years. So then the three month interest penalty really doesn't matter. But I don't think that's what's going to happen. So to recap very quickly on this, we're in an economic environment where
00:19:37
Suze: I personally think inflation has started to come down especially however, the way that they're figuring it, but it's not coming down as fast as they want it to.
00:19:49
Suze: So that will affect Series I bonds. But to tame inflation, they're going to raise the fed funds rate probably the terminal rate. The end rate will be 5, 5.5 somewhere there which makes interest rates go up.
00:20:08
Suze: I'd rather be in a place where I could get more and more money on my interest
00:20:15
Suze: such as certificates of deposits or Treasuries and then once interest rates have gone up then we'll start wanting to move into longer term certificates of deposits and Treasuries to lock in that rate.
00:20:33
Suze: With the series I bonds, we can't lock in any rate. And the only rate again on this I bond that was issued November of 22 is the .40%. Who cares?
00:20:49
Suze: So...
00:20:50
Suze: I'm not the lover that I used to be of Series I bonds. I'm so sorry Series I bonds. But for those of you who got into them at 7.1% at 9.62%. Remember your money does compound in there. So your interest is earning it as well. This last one at 6.89% was still a good one because everything is compounding for you.
00:21:21
Suze: On the other hand, for those of you who maybe have never bought I bonds before and you're thinking about should I or shouldn't I? Here's what I would tell you, it actually depends on how much money you want to keep safe and sound.
00:21:37
Suze: So let's say you have 50,000 or $100,000 that you want to earn a good interest rate. Alright. If you want to put $10,000 in right now to a Series I bonds to lock in that interest rate for six months. I don't have a problem with that. As long as you know, you're not going to have to touch that money for at least seriously, 3,4,5 years from now, preferably five years
00:22:05
Suze: Than the other money, the other 40,000 or whatever you might have. That then would go where into three month or six month, either certificates of deposits or treasury bills. If all you have is $10,000 to your name or $5000 to your name or whatever amount and you are not positive that you are going to need that money. You're not positive about that
00:22:35
Suze: and you don't quite know and you really don't have an emergency fund or anything else. I'd rather see you go into a three month, six month certificates of deposit or treasury bills 00:22:49
Suze: or even into a high yielding savings account.
00:22:54
Suze: But be careful when it comes to I bonds because of the five year lockup period.
00:23:01
Suze: That is what you have to take into consideration. Now you know what I think. I know a lot of you, I know you... you're freaked.
00:23:12
Suze: You're absolutely freaked because the last two susie schools were about changing stocks buying things for just the dividend. Do not buy it for the stock price but all of you were so thrilled because two weeks ago when I used PXD as an example and I still thought it was a good buy their truthfully it was at $220 a share.
00:23:36
Suze: But I kept saying to all of you you are to do it for the dividend. You are to do it for the dividend. You are not to buy it for it going up going down then of course it went up to 231. You all freaked out. You were also happy and now it's back at 207. And how freaked out are all of you? Oh yes.
00:23:59
Suze: Now what would I do with PXD? What would I do with Devon, another energy stock that we have been buying
00:24:08
Suze: Both of those companies... because of weather in December, the storms and everything... went through a terrible production time. They could not produce the oil barrels they wanted to produce because of that they didn't have as much oil to sell their earnings therefore went down and when earnings go down on a company, analysts freak out and everybody sells them.
00:24:39
Suze: I don't know you're buying it for the dividend. The dividend especially on PXD is really solid. They did lower the dividend on DVN, but it's still a fine paying dividend, and I do think bottom line, that these two stocks will recover and go up. But remember what I have said to you; you don't buy these stocks for price appreciation.
00:25:08
Suze: I think it's absolutely possible, Devon's back at 50 for who knows it could go to 48 it wasn't 48 this year already. I don't know if you all realize that but it could easily go back up to in the 70s. It could also stay here.
00:25:24
Suze: But I think as the weather has gotten okay, they produce more we'll see what happens. They are solid companies now I get the Devon isn't everybody's favorite energy company. They do like PXD better but up to you do you want to make a change do you not do you want to do tax loss selling here and switch up to you? I explained all of that. But this is the reason
00:25:52
Suze: that you don't buy stocks for the price movement. You want to make sure they're good quality stocks you want to make sure that they have good cash flow. They have good earnings, which these companies still do have. Because you want the dividend more than anything and that's what we were doing with this strategy because why because they're still paying higher dividends especially PXD,
00:26:20
Suze: that you can get anywhere with interest. So if you can afford to keep these for a few years and remember I've always told you do not invest in stocks with money that you will need within at least five years, don't do it.
00:26:39
Suze: So I feel okay about it. I'm not worried about it, you know will you start to freak if it goes down even more? Uh huh. Maybe especially PXD, if it goes down more, you know the dividend yield here is now a whole lot higher than it was at 231 you know by a lot it's like a 12% dividend right now. So that's my update on that. So stop freaking out.
00:27:07
Suze: In terms of the overall markets, I still think in the next two or three weeks we could see a pullback. I'm still not liking it. So I don't care that things have gone up and some things are great. I'm still taking a very conservative approach which is why
00:27:27
Suze: I like dividend paying stocks of all kinds. All your money should not just be in energy by the way. All right,
00:27:40
Suze: that was your Suze School today on Series I bonds. If you're confused, you can always write a question on the Women and Money community app and I tend to answer them there under this particular podcast when it posts. And for those of you who want to see if your question can be answered on Thursdays podcast when KT always joins me for Ask KT and Suze Anything.
00:28:09
Suze: You can always also send in a question via the Community app or to ask Suze S-U-Z-E Podcast at gmail dot com. Alright, everybody. So until Thursday, when Miss Travis will join me again,
00:28:27
Suze: remember today, wherever we go, we will create a more joyful, peaceful and loving world and never forget, you are unstoppable.
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