Inflation is bad when it comes to money. The cost of goods and services rise every year due to inflation, yet the value of a dollar remains the same. For example, $100.00 in the year 1945, is equal to $1022.20 in the year 2004. Inflation makes the value of a dollar bill worth less and less every year. According to BankRate.com, the current national average interest rate for a one year CD is about 2.5%, which is less than the average inflation rate of 3-4%. So in reality you are actually losing money with your CD, because of inflation.
To help protect your money from inflation, you can invest in I-bonds. I-bonds are Securities offered by the U.S. Treasury, and are backed by the U.S. Government. They are exempt from state and local income taxes, and you can defer the federal taxes on your earnings for up to 30 years. Plus, they can be converted to cash anytime after 6 months.
The interest rate (sometimes called Earnings Rate) of an I-bond is determined by combining a fixed rate of return, with a semi-annual inflation rate. The U.S. Treasury determines these rates on May 1st and Novemeber 1st of every year, and then combines them to make the earnings rate for an I-bond. As of May 2010, the current earnings rate on I-bonds is 1.74%
I-bonds can be bought through your local bank, or online at http://www.savingsbonds.gov. They can be purchased at face values of $50.00 all the way up to $10,000.00. To cash an I-bond, simply go to any bank that will cash a bond, and you’ll get your money. The maximum amount of money that you can invest in I-bonds per year is $30,000.00.