Bonds: A Popular and Safe Investment?

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This almost seems like an oxymoron- popular and safe. I mean in these inflationary times everyone is looking for more value, greater return on their investment and low risk. But when we find an investment with those attributes, and it’s popular, it usually feels unsettling.

For example during the pandemic, there was a popular “investment“ in the “Blessing Wheel” that promised significant returns and low risk. As it has turned out several people who invested invested were never blessed.

Today, another very popular low risk, high return “investment” opportunity is known as the
Hyperverse. While I am not very knowledgeable of the opportunity, there are challenges with people who “ invested” being able to withdraw returns on their investments. In some cases they will only receive a percentage of their initial investment. One takeaway is that, low risk or safe investments which are popular, tend to display the characteristics of what may turn out to be some type of pyramid or Ponzi scheme. But can there be some investment in this inflationary moment with low risk and yet is popular? I recently looked into that question and here is what I found:

Bonds

There are generally two types of investment instruments most people invest in today and they are stocks or bonds. What are bonds? In simple language think of a bond as a loan make to a corporation, government or some municipality. These institutions create bonds to raise money which they will repay at a specific date to which, also, will be attached periodic interest payments along the way, usually twice a year.

Now that you have a working understanding of what bonds are, know that bonds are very popular today since inflation has skyrocketed. Their popularity stems simply from the fact that the composite interest rate paid on bonds today is 9.62% for those issued from May through October 2022.

How this Investment Grows

The interest rate paid on these are bonds known as the composite rate is made up of two components. The first part is the fixed rate which remains the same throughout the life of the bond. The second part of the composite rate is what is know as the inflation rate. This component is tied to the rate of inflation which is determined by the consumer price index (CPI). The average change in the price you pay as a customer for goods over a period of time, say monthly, is how the CPI is calculated.

The U.S. Treasury Department establishes each May and November what both the fixed and inflationary parts of the composite interest rate will be for the following six months. In other words, next month the Treasury Department will announce how much interest the I bonds will pay. The current fixed rate for bonds issued from May through November is zero. I should hasten to tell you that if your are contemplating purchasing I bonds from the U.S. Treasury, the deadline to do so is October 28, 2022 if you want to benefit from the current interest rate of 9.62% according the Treasury. Having said that, if you wait until the last day to purchase the bonds, they will have a November date since bonds are issued the next business day after the date of purchase.

The Down Sides

I bonds are not redeemable in the first year of purchase. Further if the bond is cashed out in less than five years you forfeit the interest earned in the last three months prior to cashing in.

Bonds earn interest from the issue date while interest is compounded semiannually. The interest earned is added to the principal. Because there is a three month penalty associated with early withdraw of your bond, if you purchase a new bond today, you will not see interest on your purchased bond until the fourth month. Said another way, the three months interest earned penalty is subtracted from your bond balance from the beginning.

How to Get Started

After conducting your own research or contacting your financial advisor, you discover that you can invest $10,000 dollars. However if you want to invest more, you can do so by investing your income tax refund up to additional $5,000.

Getting started is easy enough by going to www.treasurydirect.gov. You will also find information on other types of bonds and financial information. While this investment is safe since it is backed by the United States Government it’s also very popular given the rate of inflation today. A rare combination indeed.

WHAT’S UP!

Today’s what’s up is about inflation and the Internal Revenue Service (IRS). If you are a single taxpayer or married filing separately the standard deduction will be increased by $900.00 to $13,850 for 2023 . For those who are married and filing jointly, 2023 standard deduction for couples married filing jointly is $27,700.

Finally, for those filing as head of household the standard deduction will be $20,800 for tax year 2023 . And while that’s nice, but people need relief from inflation immediately and these rate changes will not have any impact until you file your taxes in the year 2024. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC . Give2Get Rich, LLC 2022. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.

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