How to Buy an I Bond

Picture of the front page of the Treasury Direct website

If you looking to buy an I Bond, but you’re not sure where you need to go or what you need to do, you’ve come to the right place.  Just follow these simple step-by-step instructions.  They will help you set up your TreasuryDirect.gov account and buy your first I Bond.  If you have a printer, you may want to print these instructions so that you don’t have to go back and forth between these instructions and TreasuryDirect.

This could take 15 – 30 minutes.  It’s good to take your time.  There’s no reason to hurry.  I suggest doing this on a computer, not a cell phone because you may be asked to allow your computer to use “Flash.” One of the demos provided at TresuryDirect uses Flash and should work fine on IE, Edge, Firefox and Chrome  browsers.

If you are wondering why you would want to buy an I bond, please read the articles: “I Just Want to Save My Money!” and “Why Bonds are Smart for Savings“.

Step 1: Gather Your Info

You need to be a “U. S. Person” and have a Social Security Number in order to buy U. S. savings bonds.  It’s one of the special privileges you have just for being a United States citizen.

You will need an address in the United States if you want to participate in buying I Bonds directly from the government, so have that ready too.

You will need to have a checking or savings account so that you have a way to pay for your I Bond.  You can’t pay with a credit card but it’s ok if you don’t have paper checks.  You just need to call your credit union or bank and get your checking account’s routing number and account number so you can pay Treasury Direct with electronic checks.

Like most online services these days, you will need to provide Treasury Direct with a valid email address.  They intend to contact you electronically with information about your account.

You have to have a computer with a browser that can create a private line to Treasury Direct.  Pretty much all computers for the last ten years have been able to do this.  The computer you are using to read this should work as long as it is a private one.  It’s probably not a good idea to do your finances on a public computer.

Step 2: Take the Guided Tour at TreasuryDirect.gov
Picture of the TreasuryDirect Guided Tour page

Although this government site has its own oddities, they’ve done a great job of holding your hand through the process of setting up your account.  You and anyone in your household that has a Social Security Number is entitled to have a free account directly with the United States Treasury.  They have a pretty nice “Guided Tour” that shows you the steps that you will go through when you set up your account.  Here it is:

TreasuryDirect.gov’s Guided Tour

If you need to type the address in, here it is:

https://www.treasurydirect.gov/indiv/TDTour/default.htm

Step 3: Complete the Application Process at TreasuryDirect.gov

The application process will allow you to set up your TreasuryDirect.gov account by entering the information that you have collected.

From the Guided Tour page, you can find the application link in the upper-right corner of the page.  It’s called “OPEN YOUR ACCOUNT NOW“.  At the time that I write this, the letters are pretty small but they are all orange.

f you are on the Treasury Direct starting page, you will find the place to open the account underneath the orange login button.  Just click on the words: “Open an Account

Make sure that you record:

  1. Your new account number
  2. Your new password
  3. The answers to your security questions (they will ask them sometimes and it will lock you out if you don’t answer them correctly)

It’s a good idea not to save these things on any computer or cell phone.  You might consider writing these down and saving them with other vital records and information you keep.   Physically locking the information in a safe would be one good idea.

Step 4: Watch the Accessing Your TreasuryDirect Account Demo
Accessing Your TreasuryDirect Account Demo Page

The TreasuryDirect site has quite a few security features.  It’s a good thing but it also makes it a bit harder to use.  I highly suggest that you watch the Flash Demo that they have created at the TreasuryDirect.gov site.  You can click on the graphic on the right or  click here.  Make sure that you say “yes” if your browser asks if you want to us “Flash”.

Here’s the address if you need to type it in:

https://www.treasurydirect.gov/indiv/myaccount/myaccount_demo.htm

Step 5: Sign In to TreasuryDirect

To log in, locate the “Account Login” section in the upper right corner of the TreasuryDirect.gov website.

Select the “TreasuryDirect” link in that section. On the next page, select the orange “LOGIN” button.

If this is the first time that you have logged in, you may be asked to check your email for a special passcode.  This is a security protection to make sure that it is really you.  You must enter that code that you get from your email.  You can choose the option to allow TresuryDirect to remember your browser.  That way you won’t have to get special codes in your email every time you attempt to log in.

On the next screen you must enter your new Account Number.  That’s not the passcode.  That’s the one that you used when you first applied in step two above.  After typing in your account number, hit the “submit” button.

You will then be taken to a screen that allows you to choose an image and a phrase.   This might seem a bit silly, but it is actually a good security method.  TreasuryDirect will show you this picture and phrase every time you log in.  It’s a way for you to know you are actually accessing TreasuryDirect and not a fake.

If that image is ever not the one you remember. It’s a good idea to close your browser and contact TreasuryDirect by phone and tell them that something is wrong before going on.  All these things are there to make sure that you are protected and that’s a good thing.

Below that you will see a graphical keyboard.  Instead of typing your password using your keyboard, you need to type your password using the graphical keyboard, with your mouse.

After you hit the “submit” button, the weirdness is pretty much over.  You will now be signed into TreasuryDirect.  You should see a welcome message with your name at the top of the screen.

One other strange thing to keep in mind about the TreasuryDirect website: Don’t try to use your “back” button in the browser.  That will force you out, requiring you to log in.  TreasuryDirect will only allow you to use the buttons on the page to navigate.  All these things help the web site give you a very secure environment.

I did find some graphical instructions at WikiHow that may also be very helpful.

Step 6: Buy Your I Bond

Now for the fun part.  We are finally to the point at which you can buy your first I Bond.

Now that you have logged into your account, you will need to click on the button at the top called: Buy Direct

You will then see a list of options of things you can buy.  In the list you will see an option for “Series I – An accrual-type security with a combination interest rate of a fixed and an inflation rate”

Select that option and Hit the blue Submit button.

You will a place to enter your “Purchase Amount“.  Enter the bond amount here.  You can have a bond as low as $25 and if this is the only bond you plan on buying this year, you should be able to have one for as high as $10,000.  I haven’t tried that before but it should work as long as you have the money.  Make sure that the “Select a source of funds” drop-down box shows your checking account and then hit the “Submit” button.

That’s it.  When you log back into TreasuryDirect, you will be able to check up on your I Bond and see its current value.  This is also the place to go when you are ready to sell your bond.  You can’t do that for the first year, because that’s one of the rules.  It’s best to hold on to your bond for five years so that you get all the interest.

You can also buy other kinds of treasury investments this way including TIPS.  That’s all it takes to take advantage of one of the safest and most effective ways to save for your future.

How Inflation Protected Mutual Funds Fail to Protect (Part One)

Egg Balanced on ForksInflation protected bonds are a great way to protect your long-term savings and it’s easy assume that inflation protected mutual funds or ETFs are just as good, but that’s actually not the case.   There’s increased risk to savers who hold bonds in a mutual fund.  In this two part series, I explain some of the risks and why I don’t recommend using funds for this purpose.

The Benefits of Mutual Funds

Mutual funds are pretty convenient to an investor.  They are relatively easy to buy and sell and are managed by professionals.  They allow us to leave our investments in highly qualified hands.

Mutual funds are also very well advertised.  You can find out a lot about them because they are in almost everyone’s 401k. Mutual funds can be a win-win situation for the novice investor and the experienced money manager.  The problem with mutual funds and ETF’s is that they are inherently more risky than bonds because they have added exposure to market forces.

Preservation vs. Opportunity Investments

When we are saving, we intend to preserve our money for a specific point in time.  Mutual funds help us take advantage of investment opportunities, but they don’t commit to pay at a point in time.  We are able to pick a good management team and pay them to pick the best time to buy and sell stocks and bonds, but they don’t promise that our money will be there when we need it.

As I mentioned in the article: “Stressed about Savings? Divide and Conquer!”  it’s very helpful to divide your money into two separate parts before you start.  Mutual funds can be a valuable part of the opportunity side of your investing, but too risky for the preservation side.

The Safety of Bonds

Bonds have traditionally been a much better place to store money for long term savings.  That’s because bonds are loans with a due date.  When a bond matures, you get all your money back.  I discuss this at length in the article: “Why Bonds are Smart for Savings

The danger bonds have is the possibility that your money won’t be paid back to you at all.  We do have to consider who we are loaning our money to.  Risky bonds are not good investments for savings either.  You can diversify them, but they are still not good preservation tools because you may not get all your money back when you need it.  Good quality bonds, however, can be seen as a good method of saving for the long term as long as they are adjusted for inflation. That’s because you have a reasonable commitment that you will be paid on time.  Mutual funds, on the other hand, don’t come with a commitment to pay anything.

Bond Funds

As safe as bonds are, you would think that putting bonds into a mutual fund or an ETF would produce the best of both worlds, but that’s not the case.  A surprisingly risky set of things happen when you put bonds into a fund.

When you invest in a bond fund, you are not owed anything anymore!  When you own a bond directly, the bond issuers legally owe you money on a specific date.  In a mutual fund, the bond issuers owe the fund money, but they don’t owe you anything directly.  This is very important to understand.  If you intend to insure your savings, then it’s better to choose a method of savings that provides you a direct guarantee.

You might be wondering why a bond fund would not be able to pass along the bond issuer’s guarantee.  There are some valid reasons.

Funds are Mutual, Bonds are Not

It’s important to understand that a bond fund is owned by a group of people.  This creates a problem for savers.  In order for a bond to preserve your money, you must hold that bond until it matures.  There is no money available until a bond matures, unless you are willing to sell the bond at the current market rate.  Funds, on the other hand, allow shareholders the ability to buy and sell at any time.  If all of the other shareholders had the same intentions as you, it might work well to use a bond mutual fund, but that isn’t the case at all.  There are some shareholders that may actually sell their shares before the bonds in the fund mature.  If enough people do that at the same time, it could force the managers to sell some of the bonds at a rate that is lower than what was paid for them.  As you patiently hold your shares, the value in the fund would go down because of what others decide to do.

Bond Market Exposure

What this tells us is that by putting a bond into a fund, it exposes the fund to the bond market which can be as unreliable as the stock market.  If the bonds are always held to maturity, they have no exposure to the bond market and there is nothing to worry about.  I have found that bond funds usually follow bond market prices, not bond maturity values.

Let’s consider some of the risks the bond market exposes an investor to.  Remember that the bond market is just a place to buy and sell loans that haven’t been paid back yet.  The market is subject to what buyers and sellers perceive about the future.  Since these loans are dependent on an interest rate,  investors are exposed to the potential that the bond’s interest rate will seem small in the future compared to newer bonds and other investments that become available.  Since investors want to hold loans with the largest payout, the loans with the lower interest rates would lose market value.  They could even lose enough value that they temporarily fall below the original principal.  If a fund manager is forced to sell at that point to pay a mutual fund shareholder, it deeply hurts the fund.  Since you own a share of that fund, it hurts you too.  When you buy a bond directly, you can hold the bond and ignore the market.

Click here to go on to part two

Why Bonds are Smart for Savings

Colorful Eggs in Small Colorful BucketsBonds are one of the easiest and most common ways to save money for the long term.  There’s a good chance you already own one.  If you have a certificate of deposit at your bank or your credit union, you own a kind of a bond.  CD’s are quite a bit different than other kinds of bonds, but they have many things in common.

Rather than going over different kinds of bonds, I’d like to explain why  they are a good investment for those of us saving for future needs.  In a previous article, I described two ways of looking at our investments.  Bonds are very useful for the part of our savings that we intend to preserve.

Bonds Eliminate Timing Risk

I mentioned back in my introduction to TIPS that bonds are actually a  type of loan.  CD’s are loans that you make to the bank.  If you ever wondered how to turn the tables on a bank and get them to pay you interest, that’s how.  If you have had a CD before, you know that it has an end date.  That’s how bonds work.  They “mature.”  When they do, you get your money back.

Because bonds have a due date, they are great for eliminating timing risk.  Bonds come with a promise to return your money on a specific day.  If you intend to go on a big vacation in two years, you can get a two year CD at the bank and earn higher interest than you would in a regular savings or checking account.  When the CD matures, you get your money back and all the interest right when you need it.

You can imagine what might happen if you put that money in a mutual fund for two years.  If you happen to have planned your vacation during the next stock market crash, you probably would have to change your plans.  It might be ok to miss your vacation, but putting off your retirement because you took that risk would probably be a bigger deal.

Certificates of Deposit and Inflation

Taking out a two year CD might not be that bad.  At the time I write this, CD rates are still quite a bit lower than the rate of inflation.  When that is true, you end up paying the bank to hold and protect your money.  That’s not always a bad idea.  Putting all that money in your house might be worse, but it sure would be nice to be able to keep up with inflation don’t you think?

I Bonds vs. CD’s

You might consider I Bonds for a two year holding time or more.  You can’t take your money out for the first year, so if you need the money sooner than that, it wouldn’t be a good idea.  If you need the money in less than five years, it would still be a pretty good idea to put your money in an I Bond because it protects your purchasing power at the cost of losing three months of interest.  It’s still better than most bank CDs at the time that I write this.  After five years of waiting, you can take the money out any time.  If you have more than 30 years to wait, you will have to sell your bond in thirty years and get a new one.  You can find out more about I Bonds in another article.

The advantage of using an I Bond over a CD is that you are more certain to keep up with inflation.  There are CD’s that allow you to “step up” your interest rate if the interest rates go up at some point.  The problem with that is that interest rates and inflation are not really linked.  The will of the government is in between.   Governments occasionally force interest rates lower as a way to “fix” the economy.  As a result, CD’s have proven to not be a very precise way to protect your money’s purchasing power.

Using a Bond Ladder

Ladder with fruitYou may have seen an article or heard someone at your bank talk about putting some money in a CD ladder.  This arrangement helps you take advantage of changes in interest rates over time.  It’s another way to attempt to deal with inflation issues as well.

The idea is that you split up your money, and buy CD’s or bonds with different maturity dates.  For instance you might buy one for six months, another for one year and another for two years.  The idea being that every six months you would have a CD coming due.  When it does, it allows you choose whether you need to use some of the money or put it back into another CD.  It also allows you to take advantage of changes in the interest rates as they go up.

When you are trying to save your money for later, bond ladders have much different purpose.  When you are using inflation protected bonds like I Bonds or TIPS you don’t really have to worry about the interest rates.  Remember that taking advantage of rising interest rates is the kind of thing we do with the part of our money set aside for opportunity investing.  When we are dealing with the preservation side, what we concern ourselves with is timing.  We just need to ask ourselves: When do I need this money?  In this case, we would use a ladder to put the right amount of money in the right place in the future to meet our needs.

Here’s an example.  Suppose you need your money in 15 years.  It may require that you take out a ten year TIPS, and after 10 years you need to remember to buy another 5 year TIPS when it matures.  You can think of your needs like buckets of money.  Let’s say that you have one bucket for each year during your retirement.  You need a ladder of bonds that reach to each bucket in order to fill them with the right amount of money so that you meet all of your needs.

Beware of Bond Mutual Funds

Bond mutual funds don’t have a maturity date.  Shorter duration funds may be safer than stock funds, but they are definitely more risky than just owning the bonds.  That’s because the fund share prices change every day based on market forces, not inflation.  I plan to explain that more in an article about mutual funds.

A Smart Way to Plan

Bonds are a great way to plan because they are based on time commitments.  Not everything in life can be planned, but for things that need to be, it really makes sense to use investments that have commitments built into them so that you can be sure to have money when you need it.