Federal Savings Bonds Paying 2.3%

Hi everyone. IlliniProgrammer, resident forum saver here, reminding folks that it's always good to have an emergency savings fund that can cover 6-12 months of expenses.

Right now, online savings accounts are paying terrible yields- 1% at the most. Ally.com had a great deal on 5-year CDs with easy withdrawal policies a while back, but that ended with the ten year treasury sinking to 2% yields.

One place, however, that hasn't been hit as hard is Series I (inflation) Savings Bonds. Right now, with September 2010-March 2011 inflation running at a 4.6% clip, Series I Savings bonds are paying 4.6% for the first six months if you buy them in September or October.

Savings bonds have a few rules:

-There is a 3-month early redemption penalty if you redeem in the first five years.
-You can't redeem them for 12 calendar months even with the penalty (IE: if you buy on September 20th, you have to hold until September 1st of next year.), and they are non-transferrable. You can't sell them, so you are stuck waiting for 11 months to cash them out no matter what.
-There is a $5K per SSN maximum purchase per calendar year for paper bonds, and $5K for electronic bonds.

But even working around those rules, you're guaranteed 2.3% interest if you buy today and hold until September 1st. And if inflation for March 2011- September 2011 stays around 3%, you're looking at more like 3% interest with a 3-month early withdrawal penalty. (3.8% if you decide to hold on to them until a 0-inflation period or for five years.)

If this doesn't make it easier to save, I don't know what will.

To buy, you can head into nearly any bank, request the yellow Series I Savings Bond form, and pay via cash or cashier's check. You'll receive the paper bonds through the mail in 4-6 weeks.

Alternatively, you can buy electronic bonds online through a treasury direct account:

http://treasurydirect.gov/indiv/myaccount/myaccou…

Series I savings bonds track inflation until maturity in 20 years, never lose value (they stop paying interest for a six month period if CPI would cause the yield to go negative for that time), grow federally tax deferred, and are exempt from state income tax.

There is obviously some disagreement about how CPI is calculated, but the bottom line is that CPI still tracks a consumer basket and does tend to scale with the average consumer's cost of living. Regardless, the bond is paying much better than anything you can get in a bank right now. So if you need to boost your cash savings, this might be one way of doing it.