Podcast Episode - Suze School: Understanding How Series I Bond Interest Works

Listen to Podcast Episode:

On today’s episode, Suze explains how the US Treasury figures the interest you earn in a Series I Bond and why during the first five years you hold the bond, what you see on your statement is not really what you have in your account.

Podcast Transcript:

00:00:33

Suze: August 21^st, 2022. It's a great Sunday morning, if you ask me. KT is already out in the dark, tending to her garden. Colo is already up and about, because number one we caught, believe it or not, Colo caught, a wahoo on a slow pitch jig, which is like a pole that's like half an inch thick,

00:01:01

Suze: It's August, it's not even wahoo season, and somehow he caught a 32 pound wahoo on his jig, plus he caught a tuna, so he's already down there now for filleting them. So everybody is very happy, and it's a beautiful Sunday morning.

00:01:20

Suze: And you know I have a saying, one should always see the sunrise and the sunset. So it's one of our greatest pleasures to get up at four or five in the morning when it's really, really quiet and there are no workers, there's nobody around and just to bring in the morning. Fabulous thing to do. 

00:01:40

Suze: Also, I just have to say Lori Brown, one of my oldest friends in the world, it was her birthday yesterday. She was 71. Happy birthday, my dear Lori. You know Lori and I have been friends now,

00:01:57

Suze: for over 60 years. It's really something. Maybe even over 65 years. And it's just so incredible to have friends like Lori, and like Roxanne, and Leslie, who go all the way back with you. Until you were like you know 11, 10, 8 years of age. And none of them would believe that I became who I became. But they were wrong I did.

00:02:25

Suze: But how fabulous it is, Lori for you to still have another birthday, because with every birthday, it's another year that we get to love each other up. 

00:02:36

Suze: I also told you that today I was going to be making an announcement about something every single one of you is going to want to do with Alliant Credit Union. And I told the team at Alliant, I said guess what, on my Sunday podcast, I'm gonna tell everybody. And they said no, no, no, you can't. So what you mean I can't? They said Suze, it doesn't officially start until August 22nd. 

00:03:05

Suze: Your podcast is on the 21st. You can't tell them yet. And I'm like, uh oh. So tomorrow I will be doing another podcast, August 22. I will be telling you all about it, and it is a podcast that every single one of you should absolutely listen to, and get every friend that you have, post it everywhere. Because it really is 

00:03:35

Suze: a transformational idea that you're going to hear about tomorrow. Also for those of you who also have the Ultimate Opportunity Savings Account. And you've been writing me saying Suze, I got my $100. Can I get another $100? Well if you listen tomorrow, you'll find out, not only can you get another $100, but how through you, you can give another $100.

00:04:01

Suze: And you'll find out more tomorrow. 

00:04:04

Suze: Now are we ready to go to Suze School on what I think is one of the more complicated topics I've ever tackled, even though it really shouldn't be. And that topic is how does Treasury Direct, credit the interest rates to you on your I bonds? 

00:04:25

Suze: And the reason that I'm doing this is because all of you have bought I bonds now at least six months ago, a year ago, a year and a half ago, and you're all seeming to write me all at once. I don't know why this is, there's like a topic that kind of catches fire. And even though you don't know what you're writing me on asksuzepodcast@gmail.com, it all seems like you've gotten together and maybe you're all friends writing the same question. And it's Suze,

00:04:54

Suze: I look at my online statements for my I bonds, and I don't have anywhere near as much interest in there as I think I should have. What is that about? 

00:05:07

Suze: And I can relate to all of you because remember I've been doing I bonds since 2001 and I remember years ago, you know, 10 years ago, you know, 20 years ago now, even I would go on treasurydirect.gov when it was available, and I would go wait a minute. I'm not making any interest on my I bonds. Why is that? 

00:05:29

Suze: And it was very very confusing. Now. Back then, it was easy for me to pick up the phone, call Treasury Direct, anybody could do it. You could get them to answer you via email. It was very easy back then.

00:05:43

Suze: Because not that many people were doing it and they were able to explain to me over and over again. It took quite a few calls by the way, on how interest on I bonds are actually calculated according to their formula. So I get why all of you would be confused. So let's see if I can straighten this out

00:06:05

Suze: via a podcast. I wish I had a little chalkboard that I could go here. This is how it works. Do this, do that. But this is an audio podcast. So I would advise that you might want to take out some paper as well as a pen or pencil and maybe just write down a few notes for yourself. Alright, let's get some basics about I bonds. 

00:06:30

Suze: The first basic you have to know is that when you invest in an I bond,

00:06:37

Suze: you cannot take any money out the first year whatsoever. And years two through five, if you redeem any amount of money, there is a three-month interest penalty. 

00:06:52

Suze: So the Treasury

00:06:55

Suze: during those five years, 

00:06:59

Suze: decided that when you look up the amount of interest that is showing in your account, they're going to only show you

00:07:10

Suze: what you have, minus the three month interest penalty. 

00:07:16

Suze: So therefore if any time after year one through year five, you decide to redeem, you're going to see exactly what you would get.

00:07:30

Suze: Now. That doesn't mean that you aren't earning more interest. Because your money actually is earning interest from the very first month. But they're not going to show you that interest, because they are going to assume that there is a three month interest penalty. 

00:07:52

Suze: The other thing you have to know, and this is where it gets weird. Do you remember like it was April 2022, we were debating should you put money into your I bond account now and lock in the 7.12% interest rate, which is what it was paying, or should you wait until May 1st to do it

00:08:14

Suze: to get the 9.62%. And I went back and forth on it, oh no, wait until May, no do it in April. Finally, I decided let's do it in April, let's lock up the 7.12 for six months. You know you're gonna get 9.62% guaranteed after that for six months, because none of us really know in November what the new interest rate is going to be. 

00:08:43

Suze: So we decided, yes, yes, do it in April. And by the time we decided this, it was already like April 20^th or even the 25th 2022. And let's just say you did it at that point in time.

00:09:00

Suze: Even though you invested in I bonds at essentially the end of the month,

00:09:07

Suze: listen closely everybody, your interest rate that you are credited started April 1st of that month. 

00:09:18

Suze: So any time you invest in an I bond, 

00:09:23

Suze: you're actually better off investing at the end of the month, because then you almost get an entire free month of interest, because interest starts accumulating the first of the month that you invested in, even

00:09:41

Suze: if it was at the end of the month that you did it.

00:09:45

Suze: You should all write that down,

00:09:49

Suze: because when interest rates are especially this high, that's a big deal. That's an extra $60 or $80 for that one month of interest.

00:10:01

Suze: And you did it at the end of the month. Now, I just have to say this, I'm going to deviate for one second. The same is true by the way,

00:10:09

Suze: when you redeem, when you redeem a bond,

00:10:14

Suze: so when you redeem a bond, you want to redeem a bond at the very first of the month, because even if you redeem a bond at the end of the month, you're gonna lose the entire interest for that month. 

00:10:31

Suze: So it's not like they do it per day, they do it by the first. 

00:10:36

Suze: All right. So when you are investing in I bonds, you want to invest in the last few days of the month that allow you to qualify in your interest will start the very first of that month. When you are redeeming an I bond, you do not want to wait to the end of the month. You want to redeem the very first of the month. 

00:11:02

Suze: Now, why is that? So listen closely again. Because this has a lot to do with when you see your interest shown in your treasurydirect.gov account. 

00:11:19

Suze: So because the Treasury 

00:11:22

Suze: gives you essentially one month of free interest, remember you invested at the end of the month in April, but you started to get interest April 1^st.

00:11:35

Suze: Because they're essentially giving you one free month of interest, they want that one free month back when you redeem within the five-year period of time. 

00:11:51

Suze: So what that means is, that even though your money is accumulating interest, they do not show you any interest accumulation, until your fifth month that you have had a series I bond.

00:12:12

Suze: The fifth month. So you may want to write these months down. What that means for you, is that if you bought an I bond in January, the first of any year, doesn't matter. If you buy an I bond in January, you are not going to see any interest accumulation until May of that year. 

00:12:37

Suze: Five months later. January, February, March, April, May. 

00:12:43

Suze: If you bought it in February, you won't see it till June. March, July, April, August, May not till September, June not till October. July not till November. August, not till December. September, not till January. August, not til February. November, not till March. December, not till April. You do not see any interest at all 

00:13:10

Suze: on your statements till the fifth month. Again. Why is that? It's the first three months of an interest penalty that they are assuming, year one through five,

00:13:26

Suze: and that one extra month, that fourth month, of free interest that they gave you.

00:13:35

Suze: Now, that does not mean that you have not been earning interest. 

00:13:42

Suze: So let's just say back in November of '21, which I was really pushing this heavy at that time, when interest rates first were announced at 7.12%,

00:13:56

Suze: and let's just say you bought it November of ’21. Because the one person who really has written in five times now, that's when she actually bought $10,000 of an I bond. So I'm kind of doing this for you Deborah. Anyway, now remember when they quote an interest rate, such as 7.12%,

00:14:21

Suze: that is the annualized interest rate. 

00:14:25

Suze: But that interest rate is only good for six months. So that means, you will only be getting 3.56% actual interest on the $10,000. 

00:14:41

Suze: In May, when it switched to 9.62%, that was the annualized yield. You will only get 4.81% for those six months. So when you do the math,

00:14:58

Suze: and let's say you bought $10,000 of an I bond in November 2021, your actual interest rate for those six months 

00:15:08

Suze: is 3.56%. 

00:15:12

Suze: And you do the calculation, and a few times $10,000 by 3.56%, in your head, you should have earned $356. But when you in fact look in April of 2022, which would be six months after November 21,

00:15:38

Suze: you look and on your statement online, all you see is $116 of interest, and you freak out. And then you write me. Now, why is that? 

00:15:54

Suze: Again, listen closely. You actually did earn $356 of interest. That is your cumulative interest that you earned in those six months. 

00:16:09

Suze: But remember I told you, that for the first four months, and not until the fifth month, you do not see 

00:16:19

Suze: any interest, because why? They're taking away the three months of interest penalty in case you redeem, and the one month of free interest. 

00:16:29

Suze: So if you do the math, you actually are making approximately $60 of interest a month,

00:16:40

Suze: and that really started in November 2021. 

00:16:45

Suze: But what happens is, because they do not count it online for you to see for those first four months, in the fifth month, which would be March 2022, which is the first time you see interest that's online, 

00:17:05

Suze: they only show you 

00:17:08

Suze: $60 of interest because they're not showing you the first four months, because they're assuming you have redeemed. But your cumulative interest that you have earned, by April 2022, if in fact you bought it November 21, is $356. 

00:17:30

Suze: Now obviously in May, the interest rate changed to 9.62%. You're only going to get 4.81%. 

00:17:42

Suze: However, I want you to remember that that 4.81%, you're going to be earning that on $10,356, which is truly what you have in your account. 

00:17:59

Suze: So if you did the math, and you times 4.81% by $10,356, you would realize that over the next six months, you will earn $498. You add that to the $356 that you already earned in the first six months,

00:18:22

Suze: And truthfully you have a total of about $854. It may be a little bit more because interest rate is compounding, but that is how much interest at the end of October 2022 you would have earned. Now listen closely again.

00:18:41

Suze: However, you go online, you look it up, and you see the value is $520. Because remember November 1st, you could actually redeem this bond if you wanted to. So all you would get back would be $10,520 because of the interest penalties. However if you didn't redeem it, 

00:19:08

Suze: you would have $10,856 in there to earn whatever is going to be declared on November one of this year. 

00:19:22

Suze: Now, truthfully, this really only is a problem during the first year, eerybody because it's the first year that you're going online, and you're looking in the first month, or the second month and the third month, and the fourth month. And you don't see any interest accumulated whatsoever, and you're going like, what's going on? Well now, you know.

00:19:45

Suze: And after this first year and you're sitting in there, you'll be able to see everything you need to see. That you really are earning the interest rate that you want to be earning. 

00:19:57

Suze: Now that may be confusing to all of you. 

00:20:01

Suze: But what your takeaways from this need to be is this. When you buy a Series I bond, buy it the latest at the end of the month as you possibly can, so that you know, you will be able to purchase it and it's cleared because interest starts earning day one of that month, even though you did it at the end of the month.

00:20:25

Suze: When you do one day go to redeem, redeem on the first of every month. Because if you waited even till the last day of the month to redeem,

00:20:37

Suze: you're not going to make any interest on that because they're getting back that one month of free interest that they gave you when you first bought. You are not going to see any interest show up on your online account

00:20:55

Suze: until the 5th month after you have purchased.

00:21:00

Suze: And that fifth month is only going to show you what you actually earned in interest the first month. 

00:21:09

Suze: Your money is truthfully compounding for you. After the fifth year, you will see it all there without any penalties whatsoever. 

00:21:20

Suze: So 

00:21:21

Suze: that's how it works. It's really just that simple. All right everybody, don't forget to tune in tomorrow to hear what I think is one of the greatest offers the Alliant Credit Union has ever made to help make this world a better place, as well as your personal financial world. But until then, there's really only one thing that I want you to remember when it comes to your money. 

00:21:46

Suze: And that's for you to be smart, strong, safe and secure. See you tomorrow. Bye bye.

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