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# CD Rates Down, Savings Rates Steady, I Bonds Up

It’s hard to be a saver in the United States. Between the constant assault on our senses from the advertising and marketing industry to the systemic disincentivization of saving by the Federal Reserve (lowered interest rates means savings earn less interest, which means savers are punished if interest rates are below inflation rates as their purchasing power is eroded), it’s really difficult to justify not going out and spending your entire paycheck on junk from Bed Bath & Beyond (don’t forget those 20% off coupons!).

If you look carefully though, there are still opportunities to save but they are quite fleeting. One good place to consider are CD rates, though the rates have been going down as the Fed rate plummets to the depths we haven’t seen (well, that I’ve never seen) for many decades.

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# Series I Bond Rate Calculator

Series I Bonds are inflation-pegged bonds offered by the Treasury. The interest rate you earn is a calculation that takes into account the fixed rate of your particular bond, a rate set every 6 months and follows your bond for the rest of its life, and an inflation rate that changes every six months to correspond with the CPI-U inflation rate. Here is a list of the Series I bond’s historic rates.

This post was updated to reflect the November 1st, 2009 interest rate changes.

The equation itself isn’t particularly complicated and is:
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Using it to calculate the latest inflation rate data (announced November 1st, 2009), we calculate bonds bought in this period to be earning an APY of 3.36%:

Fixed rate = 0.30% (this fixed portion remains the same until you redeem the bond)
Semiannual inflation rate = 1.53% (in May 2010, this number will change)

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0030 + (2 x 0.0153) + (0.0030 x 0.0153)]
Composite rate = [0.0030 + 0.0306 + 0.0000459]
Composite rate = [0.0336459]
Composite rate = 0.0336
Composite rate = 3.36%

## Series I Bond Rate Calculator

 Enter your bond’s fixed rate: % Enter the current inflation rate: % The current bond yield is: %

Remember, your fixed interest rate does not change, it is based on when you purchased your bond. You will need to look up your bond’s fixed interest rate to get an accurate calculation of your composite interest rate.

(photo by allyrose18)

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# Converting Series I Paper Bonds into Electronic Bonds

Since I couldn’t buy electronic Series I bonds in time because of user error, I went to the local bank and purchased paper Series I bonds instead. The next step is to convert the paper bonds into electronic bonds and the Treasury Department makes that pretty easy.

## Why Convert?

I’m converting because I don’t want to lose the certificate. If you lose the bond, you can always replace it by filling out Form PDF 1048 Claim For Lost, Stolen or Destroyed United States Savings Bonds but if the conversion process is easy, why risk it?

Another good reason to convert is that you’re able to redeem the bonds in any increment, you aren’t restricted to the increments you converted. The only rule is that you must redeem at least \$25 and what’s left can’t be less than \$25, which shouldn’t be an issue.

Lastly, after thirty years, the bonds are automatically redeemed. There’s no chance you’ll find the bonds in the attic somewhere in sixty years, after missing out on thirty years of interest. (there are more reasons and I just realized they have them listed on the SmartExchange site, so check them out there if you’re not convinced)

## How To Convert

The system TreasuryDirect uses is called SmartExchange. Anyone with a TreasuryDirect account can convert paper bond certificates into electronic bonds (if you don’t have a TreasuryDirect account, open one… it’s easy but it takes a week or two to get everything all set up).

The next step is to log into your account and use their Contact feature to notify TreasuryDirect that you’d like to convert your bonds. Then, after a few days you’ll receive this email confirmation:

Hello.

You can now create your own conversion linked account by following these steps:

* Click the ManageDirectsm tab.
* Select the “Establish a Conversion Account” option from the Manage My Linked Accounts menu. The Establish a Conversion Account page will display. Review the information.
* If you wish to create a Conversion Linked Account, click the Create Account button

The next few instructions are just as the email describes except instead of looking for a “Establish a Conversion Account” you’re actually looking for “Establish a Conversion Linked Account.” On that next page, click on Create Account and with that, you have created a Conversion Linked Account! (* Welcome to your new Conversion Linked Account! You may begin converting your paper bonds at any time. Yay!)

The process from here is simple and mechanical with detailed instructions available on the TreasuryDirect site in the ManageDirect page. You will essentially create a list of bonds, print out a manifest, and mail in the bonds (there’s no point in me republishing the actual details, they give step by step instructions). The process takes about three weeks once they get the bonds and you can track it by viewing your electronic manifest through ManageDirect. Use that to track the status of your bonds.

As an aside, having logged into TreasuryDirect about a million times in the last few days, I have to say the security access card is a pain in the rear. Luckily if you fail too (3?) many times (I kept forgetting to pick a serial number), they report that you failed but don’t actually lock you out. You can just keep trying, great security!

(Image by joan_thewlis)

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# Series I Savings Bonds vs. Treasury Inflation-Protected Securities

I recently purchased a bunch of Series I Savings Bonds because of the favorable fixed interest rate (1.20% if you managed to score some in April 2008) and the favorable future inflation-pegged interest rate (~2.4%). The Series I is popular because you do get to lock in both a fixed rate plus an inflation based rate. The fixed portion is set when you buy it and the inflation portion is pegged to CPI-U. If you can get protection against inflation through a Series I, why does a Treasury Inflation-Protected Securities (TIPS) even exist?

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# April ’08 Net Worth Monthly Review

This marks the actual return of the monthly net worth reviews and the first time, in a long time, that my net worth actually fell and it fell by 12.1% in the month of April. Now, before well all jump on the “jim has no idea what he’s doing, let’s go read some other blog,” I have to warn you that the fall was expected and planned for.

The fall was due to the payment of income taxes for 2007. I paid a pittance in estimated taxes last year because income from this site (and other online ventures) was relatively small and so I wasn’t required to pay much in estimated taxes. However, on April 15th, the piper had arrived and was demanding his money so I wrote some of the largest checks of my life. I had to pay 2007 federal and state income taxes as well as first quarter 2008 estimated taxes to both the feds and Maryland. The end result was chopping off 12.1% of my net worth. However, since it was expected and planned for, it’s not a big deal. Here’s a case of where the numbers don’t tell the whole story and why commentary is always important.

What did I learn from this? Numbers don’t tell the whole story. It’s much like how the weight scale might not show a fall in your body weight but the mirror shows you putting on more muscle and adding definition. Numbers are good but only to a certain extent, so don’t let it get you too high or too low because they can be deceptive. -12.1% of unexplained net worth loss is crippling, but if you know the reason and it’s not indicative of a bigger underlying problem then you’re okay. In this particular case, -12.1% was good because I earned interest on those monies as they sat in a high yield online savings account!

Other notable actions of the month:

• Series I Savings Bonds: We purchased some Series I Savings Bonds near the end of April, \$5k each for my wife and myself, in order to lock in the 1.2% fixed rate. Savings bonds don’t give crazy stock market type returns but it establishes a good base and one that is guaranteed. It locks our funds in for at least a year but the earnings are local and state tax free.
• Consolidation of Accounts: I finally rolled over my former employer’s 401(k) plan into my Vanguard account, a process that was both painless and fast. This didn’t net any financial benefits but it means there’s one less account I need to log into and review, so there’s a net time benefit in that one (I did miss out on a couple days of solid stock market increases while the funds were in transition though, boo!, but you can’t plan for those).

Looking to the future:

• Roof replacement: Our roof is leaking and has been leaking for some time now, so a full replacement will need to occur in the next month. This week I’ll contacting a few contractors to get quotes but I estimate the cost will be in the neighborhood of \$4,000. It’s a problem we’ve been aware since before the wedding (in February) but there hasn’t been many heavy rains since then so we’ve been lucky.
• Water Heater: Replacing it is on the radar but it’s currently in great working condition, it’s just old, and we may opt to replace it with a tankless version simply for the energy savings. Since it hasn’t been a priority and since the tank is in the basement, it’s been an “out of sight, out of mind” type of situation.
• Diversification: I need to take a hard look at all of our investments and make sure we’ve properly diversified. It’s something that Nickel and I have talked about quite a bit lately. He told me about Vanguard’s Portfolio Watch, which looks like a great way to help facilitate this.

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# Why Lower The Savings Bond Limit to \$5,000?

Last year, the Treasury Department limited the amount of Series I and Series EE Savings Bonds that a US Citizen could purchase in a single year to, effectively \$20,000 (TreasuryDirect release). The limit had been \$30,000 in paper certificates and \$30,000 in electronic certificates for each the Series I and Series EE bonds, meaning you could feasibly purchase \$120,000 in savings bonds (\$30k electronic Series I, \$30k paper Series I, \$30k electronic Series EE & \$30k paper Series EE) a year ago. The current limit not drops the total amount of savings bonds you can purchase to \$20,000 a year (which is still a lot for most Americans).

Why? The stated reason was to “refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.” That is not achieved by lowering the maximum limit, that was achieved when TreasuryDirect allowed you to purchase electronic bonds as low as \$25 each.

Another reason was that “Approximately 98 percent of all annual purchases of savings bonds by individuals are for \$5,000 or less.” Again, that’s not a legitimate reason to lower the maximum limit. The “it won’t affect that many people” defense won’t work for a lot of things, I don’t see why it’s viable here.

I suppose you could make the argument that lowering the maximum will help those with smaller sums if there was a limited supply of US Savings Bonds. However, if you take a look at our growing debt and growing deficit, you’d be hard-pressed to make the argument that US debt is in short supply.

So why? I’m at a loss and I don’t understand it well enough to make much of an informed guess. I would’ve expected the US government to want to be indebted to its own citizens, rather than foreign interests, so perhaps there is something else going on? I tried searching online but didn’t find any editorials or other insights into why the rate was (really) lowered. Anyone have any thoughts?

Incidentally, the Treasury announced the new rates and the fixed portion of the Series I Savings bond dropped from 1.2% to 0.00%!

0

Today is the very last day to take advantage of the 1.20% fixed rate component on Series I Savings Bonds (unless they remain at 1.20% in the next six-month period) and if you don’t have an active TreasuryDirect account with a linked bank account, you won’t have enough time to open one and purchase electronic bonds by the close of business today (last day in April). Fortunately, you can purchase paper savings bonds from most major banks and credit unions through Form PD F 5374 (I believe PD F stands for Public Debt Form) Order for Series I US Savings Bond that they should have on hand.

The form takes about five minutes to complete and allows you to purchase bonds for yourself or on behalf of someone else. All you will need is the owner’s social security number and the amount of the bonds in cash, cashier’s check, or personal check from the bank you’re buying the funds from. If you’re buying it through M&T Bank, to use a personal check you’ll need to have an account there and use a personal check from that account. It’s not a problem if you don’t have a personal check, you’ll simply withdraw the funds and have the bank issue a cashier’s check (that’s what I did).

Remember, there is an annual limit of \$5,000 per social security number for the Series I Savings Bond – be sure not to exceed that (I assume the bank will notify you if you try to purchase too much). Also, you may purchase \$5,000 in paper bonds and an additional \$5,000 in electronic bonds. (I bet this is because their paper and online systems aren’t connected so there’s no way they could enforce a single shared limit)

Lastly, the bonds won’t be issued right there, but the effective date of the bonds will be that date. The bank is authorized to act as an agent of the Treasury Department and so the purchase is effective as of the date on the stamp. When I bought them yesterday, it had a effective stamp date of April 29th. According to the back of the order form, processing takes about three weeks.

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# Emigrant Direct Foiled My Series I Bond Purchase!

I don’t know if TreasuryDirect changed their policy or if EmigrantDirect changed theirs, but my attempt to purchase Series I Bonds and take advantage of the potentially awesome new rates was foiled! I received the following message from TreasuryDirect:

Dear JIM,

We’re sorry, but your purchase request IAAAB was canceled. While trying to collect payment from your bank, they returned our debit. Please check the Investor InBox section of your TreasuryDirect account for more detailed information.

Thank you for using TreasuryDirect.

It was entirely my fault. It wasn’t Emigrant Direct’s fault, or the Treasury Direct’s fault, it was Jim Direct’s fault. The only linked account I had was from an Emigrant Direct savings account and I assumed it would still be valid to make another purchase. I had purchased \$100 in Series I bonds a while back just to play with the system and assumed everything was still good. Unfortunately, TreasuryDirect now debits the linked account rather than a regular ACH transfer (I think) and so a savings account doesn’t debit! (The other explanation was that there were insufficient funds, but I confirmed I had enough)

So the only solution is to head over to the bank and buy a paper Series I Bond so I can still take advantage of the upcoming favorable rates. I suspect it should be pretty easy, the government always makes it easy for you to give them your money :).

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