Putting away money for savings during periods of market volatility can be a real gut-punch. The higher inflation gets, the more it essentially cancels out any interest you may accrue on a traditional savings account balance. In fact, you’re likely losing purchasing power on any funds you keep in cash. Oof.

It’s left more and more people looking for alternatives to protect their short-term savings against the blow of inflation. And has more and more people talking up Series I Savings Bonds — aka I Bonds — as a go-to inflation-proof investment.

But how true is that? Here’s our guide to I Bonds: what they are, how they work, and if they’re the right investment for you.

What are I Bonds?

I Bonds are a type of government savings bond created to protect your investment from inflation. They earn a combined interest from a fixed rate and an inflation rate. The fixed rate stays the same for the life of the bond, while the inflation rate changes every six months in May and November based on the Consumer Price Index (CPI).

How do I Bonds work?

Because the interest rate I Bonds pay is tied to the CPI, when inflation rises, the interest rate on I Bonds rises, too. It also means that if inflation cools, so does the interest rate on I Bonds.

If rates change every six months, how do you know what interest rate you’ll get? It depends on what month you buy the I Bond:

• Buy an I Bond between December and June to get November’s interest rate
• Buy an I Bond between June and December to get May’s interest rate

You can check the current I Bond rate here.

Interest is compounded every six months, too. That means every six months, any interest you’ve earned will be added to the bond’s principal value, and you’ll start earning interest on that interest.

The only thing not on a six-month timeframe is the life of your loan. Your money is locked into an I Bond for one whole year; you can't withdraw it before then.

• After the first year, you can withdraw your money any time you want. But if you cash out before the five-year mark, you’ll sacrifice your last three months’ worth of interest. Alternatively, you can hold the bond for a maximum of 30 years.
• Once you’re eligible to cash out, you can withdraw as little as $25 at a time, but you can’t leave less than $25 in there.
• You don’t receive your interest payments until you cash in the bonds — but that means you don’t have to pay income tax on that interest until then, either.

How do I buy I Bonds?

You can only buy I Bonds directly from the government, and they’re capped at a max of $10,000 per year.

But before you start socking up, here’s how to know if an I Bond is the right thing to do with your savings.

Are I Bonds a good investment for me?

You may want to consider buying I Bonds if:

• You have savings on top of emergency savings. Money you might need ASAP should never be tied up in I Bonds, which lock up your money for a whole year. Instead, we recommend stashing it in a secure and accessible FDIC- or NCUA-insured bank account at all times.

• You want to maximize short-term savings. Ellevest’s typical advice is to save (in an FDIC-insured bank account) any money you’re going to need in less than two years, and invest any money you won’t need for two years or more. But where you decide to draw that line ultimately depends on how much investing risk you’re willing to take for your savings. If the current interest rate is higher than what even high-yield savings accounts pay, I Bonds could be an option for timelines right around that 1–2-year mark (although remember that if it hasn’t been five years yet, you’ll give up three months’ worth of interest).

• You’re willing to risk it but not be risky. No investment is without risk — not even I Bonds. But, I Bonds certainly do have a good pedigree: Government bonds have the highest credit rating of all the kinds of bonds (AAA). They’re backed by the “full faith and credit” of the US government, so the risk of default, aka the risk you’ll lose the money you invested, is pretty close to nothing. I Bonds are also considered liquid after that one-year mark, which means they can be easily converted into cash (another good thing in terms of risk).

Plus, after that first year, if inflation drops and I Bonds’ interest rates no longer feel worth it to you, you can always cash in the bond and invest in something else. Set yourself a reminder to check the interest rate every six months so you’ll remember to reevaluate. Or talk to a financial expert, who can help you determine if I Bonds are your inflation savings’ silver lining.

Should you be saving or investing right now? Book a complimentary 15-minute call with an Ellevest financial planner to work through your next financial move.