I bonds for vacation and emergency fund

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rossgarin
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I bonds for vacation and emergency fund

Post by rossgarin »

I've decided to invest in I Bonds for about half of our emergency fund and for our every-five-year big vacation (for which I stash away some money every month). This is my first time dealing with bonds, so I'm a little unsure of how it *works*. If I systematically invest $100 every month in I Bonds, does that mean that I'll basically have a new bond each month, with a new maturity date, and each subject to the 12-month freeze and penalty for early withdrawal (before 5 years) based on the month it was purchased?
floydtime
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Re: I bonds for vacation and emergency fund

Post by floydtime »

You could do that, but it would get messy. I'd instead get one (or several, depending on denominations you need) every 6 or 12 months. We buy a bunch annually, and that is the majority of our "vacation and/or unexpecteds" fund - the rest being in cash for flexibility.

Yes, after 5 years, you get it all (but even after just 1 year, you get all but the last 3 months of interest).
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas
Topic Author
rossgarin
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Re: I bonds for vacation and emergency fund

Post by rossgarin »

You mean it would get messy because I'll so many different maturity dates if I invest monthly? Also, please explain about different denominations...why would I want this, as opposed to just buying one bond for the entire amount I want to invest every 6 or 12 months? sorry, and thanks for the advice!
suming
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Re: I bonds for vacation and emergency fund

Post by suming »

Where and how to buy I bonds? The interest is the same everywhere?
Topic Author
rossgarin
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Re: I bonds for vacation and emergency fund

Post by rossgarin »

suming wrote:Where and how to buy I bonds? The interest is the same everywhere?
I'm buying directly from the Treasury Department through the Treasury Direct website
Topic Author
rossgarin
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Re: I bonds for vacation and emergency fund

Post by rossgarin »

Perhaps more directly, I'm wondering if I bonds are a good choice for an investment horizon of five or less years. If I buy a bond each year, then cash out in five years when it's time for our big vacation, I'll be paying the three month interest penalty on at least four of the five bonds, correct?
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archbish99
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Re: I bonds for vacation and emergency fund

Post by archbish99 »

suming wrote:Where and how to buy I bonds? The interest is the same everywhere?
You can't buy I-Bonds anywhere except from the Treasury -- treasurydirect.gov.
I'm not a financial advisor, I just play one on the Internet.
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BL
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Re: I bonds for vacation and emergency fund

Post by BL »

floydtime
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Re: I bonds for vacation and emergency fund

Post by floydtime »

rossgarin wrote:You mean it would get messy because I'll so many different maturity dates if I invest monthly?!
Yes.
rossgarin wrote:also, please explain about different denominations...why would I want this, as opposed to just buying one bond for the entire amount I want to invest every 6 or 12 months?
I was just explaining why I said bonds (plural) instead of bond (singular). If you want to invest, say $2000 every year, then you would need two $1000 i-bonds (or four $500 i-bonds, etc.). If you want to invest $5000 a year, you could get a single $5000 i-bond. That's all. Denominations aren't particularly important, so sorry to cause any confusion there.
"Do not value money for any more nor any less than its worth; it is a good servant but a bad master" - Alexandre Dumas
Iorek
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Re: I bonds for vacation and emergency fund

Post by Iorek »

floydtime wrote:
rossgarin wrote:You mean it would get messy because I'll so many different maturity dates if I invest monthly?!
Yes.
rossgarin wrote:also, please explain about different denominations...why would I want this, as opposed to just buying one bond for the entire amount I want to invest every 6 or 12 months?
I was just explaining why I said bonds (plural) instead of bond (singular). If you want to invest, say $2000 every year, then you would need two $1000 i-bonds (or four $500 i-bonds, etc.). If you want to invest $5000 a year, you could get a single $5000 i-bond. That's all. Denominations aren't particularly important, so sorry to cause any confusion there.
AFAIK, there are no "denominations" on TD-- you just tell them how much you want to purchase, betweem $25 and $10,000 and that is your holding. When I first used TD I "broke up" purchases into smaller amounts in case I wanted to redeem only part of my purchase but that too was pointless-- you can redeem any amount you want.

The only difference if you purchase them on a monthly basis is that your screen will show a line entry for each month's purchase, rather than a line entry for a larger amount.

I have seen a number of sites suggesting that ibonds are very appropriate for people who expect to need the money in more than 1 year but less than 5 because even with the interest penalty it beats the alternatives.
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JupiterJones
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Re: I bonds for vacation and emergency fund

Post by JupiterJones »

We have some of our emergency fund in I-Bonds. Beats the heck out of money market accounts, CDs, etc.
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Topic Author
rossgarin
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Re: I bonds for vacation and emergency fund

Post by rossgarin »

What would you say the ideal mix is for the emergency fund, between ibonds, CDs, and money market (others too??). I've been reading some about breakable CDs and think I might put some of my emergency find there. What should I look for?
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archbish99
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Re: I bonds for vacation and emergency fund

Post by archbish99 »

rossgarin wrote:What would you say the ideal mix is for the emergency fund, between ibonds, CDs, and money market (others too??). I've been reading some about breakable CDs and think I might put some of my emergency find there. What should I look for?
Since you can't withdraw from I-Bonds for the first year, you choose those when you don't plan to have an emergency in the next 12 months. :mrgreen:

More seriously, you need a portion of your emergency fund in something reasonably liquid -- this could be CDs with a low early-withdrawal penalty, money market, short-term bonds, etc. If your EF is large, you can consider putting the balance in I-Bonds, and waiting until you've passed the one-year mark to put the rest in.

Another tactic, particularly if you have taxable investments, is to buy the I-Bonds with "investment" money first, then after they're past the year mark to have the EF "buy" them from your investment portfolio. It's all just mental accounting, but it's still an option if the right amount of money is in the right place.
I'm not a financial advisor, I just play one on the Internet.
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Hexdump
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Re: I bonds for vacation and emergency fund

Post by Hexdump »

We bought ours and continue to do so in lieu of a Long Term Care policy.
If we need it, they will be there and inflation protected though probably not sufficient to cover health care inflation.
If we don't need them, then so much the better.
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JupiterJones
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Re: I bonds for vacation and emergency fund

Post by JupiterJones »

archbish99 wrote: Since you can't withdraw from I-Bonds for the first year, you choose those when you don't plan to have an emergency in the next 12 months. :mrgreen:
That is an important point, actually. The I-Bond trick works best when you have additional savings outside of your e-fund that you aren't planning to need for a year, such as for a big vacation, new car, house down payment, etc.

You would essentially shift money from this non-emergency portion into the I-Bond. So you I-Bond is initially your vacation fund or whatever, rather than part of your emergency fund.

After a year, you then "mentally swap" between the I-Bond and your liquid savings. So now you think of the I-Bond as holding a portion of your emergency fund, and you withdraw from your liquid savings (which used to hold that portion of your e-fund) to go on vacation, buy the car/house, etc.
"Stay on target! Stay on target!"
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