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Investing in I bonds to beat CDs & Savings with TreasuryDirect - YouTube
Channel: unknown
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hi guys my name is Ryan the frugal
analysts and recently I just bought more
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I bonds that's earning 2.2 percent
interest rate annually without any state
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income tax and is fully got guaranteed
by the US government I think I boss
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gives a better rate than a 1 year CD or
a high-yield savings account especially
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because I live in California and I
usually pay an additional 5 to 10
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percent and state income tax on a
typical interest-bearing account so in
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this video I'll go over three things the
first one is what is an I bond and
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why is it better than CDs or a
high-yield savings account
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- I'll go over the interest rate
calculation of an I bond so going over
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the fixed rate and the semi-annual
interest rate and how they're calculated
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in great detail 3 I'll go over how to
buy bonds through Treasury direct with
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screenshots along the way and also I
have a table of contents at a button on
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this video so you can skip around if you
want to so section number 1 what is an
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I bonds and why is it better than a
high-yield savings account or a one-year
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CD so I bonds are a special type of
bonds issued by the US government
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specifically for savers and similar to
the Treasuries there's no state income
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tax
you can only buy from the government
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website Treasury Directgov
and only up to $10,000 per year so it is
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limited the mechanics is similar to one
year CD but have special rules and
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restriction so let's go over them right
now
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so the first rule is redemptions after
you buy an I bond you can't redeem it in
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the first year and if you redeem it
within year 1 to year 5 you will get hit
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by a three month interest penalty but if
you redeem it after year five and longer
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there is no penalty and you can keep
accruing interest up to 30 years
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the next ruler is around taxes there's
no state income tax for i bonds and this
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is my favorite part because in
California I have to pay an additional
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five to ten percent for state income tax
so if I'm comparing it to a typical high
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yield savings account my 2.2 percent i
bonds interest rate it's more like two
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point four percent so that gives me an
additional boost in return in addition
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to that you only pay federal taxes when
you redeem your I bond so your interest
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can keep accruing year over year so
think of it like an IRA where you
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basically can accrue interest over 30
years and you only get tax at the end so
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what that means is in between years
usually a typical account would get tax
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year over a year at the end of the year
they give you a 1099 well for AI bonds
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you don't get tax on that interest you
basically keep accruing interest until
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you redeem the bonds so there is a
slight benefit in return because you're
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untaxed return is making more interest
for your account the next rule is the
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interest rate and this is by far the
most complicated part about iPods is how
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do you calculate the interest rate for
an iPod right now as of this video the
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first six month annualized interest rate
is 2.2 percent and with my state tax
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it's like getting a 2.4 percent return
in comparison to a typical savings
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account so this is why I'm putting money
into iPods because I'll get more than my
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welfare account that's giving me around
1.8% a py right now now the interest
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calculation for iPods is super unique
they have two components the first
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component is the fixed rate that fixed
rate stays the same depending on when
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you buy your bond and it is valid
throughout the life of the bond the
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other component is
inflation rate the inflation rate is
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suggested every six months and it's
dependent on the consumer price index if
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there is deflation the worst thing that
can happen is that the interest rate is
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zero but it will never be negative
now the actual complicated formula to
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calculate interest for high bonds is the
fixed rate plus the semi annual
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inflation rate times two plus the fixed
rate times the semiannual interest rate
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and to get the 2.2 percent interest rate
it is basically taking the fixed rate
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which is 0.2% at the moment and the semi
annual inflation rate at one point zero
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one percent here's a screenshot of the
math if you are curious but the most
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important thing is to the most important
thing is to understand the two variables
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of input the first one is the fixed rate
the second one is the semiannual
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interest rate now let's talk about how
the fixed rate is set so the fixed rate
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can change every May and November of
each year but there's no official
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document on how the fixed rate is
actually set and we want that rate to be
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as high as possible so looking at
historical data where I chart out the
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effective fat funds rate the semi-annual
inflation rate and the one-year Treasury
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yield it seemed like the fixed rate is
correlated to the Fed Funds rate and
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inflation last November the fixed rate
drop from 0.5% to 0.2% we also see that
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the fax fund rate dropped from 2.2
percent as calculated on November 2018
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to 1.5 5% on November 2009 teen so going
back to this Oracle when the fixed rate
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was at 0.3% the Fed Funds rate is at 1.7
percent and we are currently at 0.2
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percent right now with the Fed fund rate
at 1.5 v so it seems to make sense that
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when the Fed Funds is lower at 1.16 the
fixed rate is at 0.1% so it seems to
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make sense that currently we are at zero
2% fixed-rate and that's not a bad rate
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at all it is low and the rate used to be
higher decades ago but 0.2% seems to
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make sense at this current moment so I'm
guessing that if there is a recession
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and the Fed Funds rate drop again the
fixed rate might actually go back to
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zero so 0.2 percent is greater than zero
so it's not bad
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so Nexus have to calculate the semi
annual inflation rate and Treasury
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direct said this rate in conjunction
with the fixed rate changes in May and
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November but you can actually calculate
it yourself if you want to geek out on
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this the index is coming from the
Consumer Price Index and more
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specifically the Consumer Price Index
for all urban consumers or CPI - you so
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let me show you the calculation I'll put
the website links at the bottom of this
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video for the BLS website so this is the
BLS website where the CPI data is
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published let's put this data into Excel
and calculate the semi annual inflation
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rate so as of this video the semi annual
inflation rate is one point zero one
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percent and that rate was calculated
last November 2019 so let's do the math
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for the November rate change the people
working inside the government is
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probably doing this calculation in in
October to release the new effective
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rate on November first so in October
they probably have the September month
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end so in September 2019 the indexes add
256 and change going back six months ago
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from September to res 19 if you divide
September index by Marshall index you
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get exactly one point zero one percent
and that is the semiannual rate that is
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active from November 2009 teen to April
2020 so let's go back and check this for
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me 2019
the semi-annual inflation rate was 0.7%
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so taking two months before May
it's Marshall index is 254 point 2 and
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the index 6 months prior is 250 2.4 on
September 2018 dividing them and getting
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the difference you get the 0.7%
and that's the semi-annual interest rate
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that you see in the Treasury Direct
website overall the interest calculation
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is interesting but the most important
thing to me is that it's currently
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giving me 2.2 percent interest rate
right now for the first six months of my
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bond purchase and there's no state
income tax and my saving account is only
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gave me one point eight percent and for
that reason that's why I'm putting more
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money into I bonds right now so how do
you invest in a bonds so right now the
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only way to buy bonds is through the
government website Treasury Directgov
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create an account there and it's a
government website so expect some of the
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functionality to be a little bit clunky
and you have this old school login page
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but it's a legitimate website that's
maintained by the government connect a
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bank account to your account and you're
ready to invest the first step is to
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click buy that rec then buy the series I
and click Submit put in how much money
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you want to put in and the minimum is
$25 and you can even go $25 and a penny
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if you really want to I just schedule it
for a single purchase and then you just
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click Submit and a second confirmation
page comes up click Submit again and
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we're done
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I decided to invest $5,000 and on a
purchase date my account got pulled five
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thousand dollars so it's really easy to
invest in high bonds once you have a
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Treasury Directgov account so video
summary I bonds are a great alternative
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to a one-year CD or a high-yield savings
account
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it pays based on a fixed rate plus the
semi annual inflation rate there's no
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state income tax only federal and it is
guaranteed by the US government
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currently I bonds are paying 2.2 percent
annually so that's it for I bonds I hope
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you can take advantage of this
government bond program let me know if
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you find this information helpful and
asked any questions in the comments
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please smash that like button for the
YouTube algorithm and subscribe for more
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frugal videos thanks for watching and
I'll see you next time
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