Bad idea to buy i-bond now?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
jxs705
Posts: 122
Joined: Wed Jul 24, 2013 9:45 am

Bad idea to buy i-bond now?

Post by jxs705 » Thu Aug 08, 2013 7:02 pm

Given the low rate of i-bond now, is it still a good idea to buy i-bond for emergency fund? The rate is so low, although I think the actual inflation is higher than that, and the there is one -year restriction. So it is not attractive to me at all. But cannot think of a better alternative for emergency fund. Any suggestions?

User avatar
tludwig23
Posts: 1660
Joined: Thu Dec 30, 2010 3:27 pm
Location: 48deg46"23"N 122deg28'21"W

Re: Bad idea to buy i-bond now?

Post by tludwig23 » Thu Aug 08, 2013 7:08 pm

The rate is low because inflation is low. You are buying protection against inflation. Your real spending power will remain the same whether or not we have low or high inflation. So yes, for an emergency fund they are still a good idea.
That's what I do: I drink, and I know things. --Tyrion Lannister

User avatar
dphmd
Posts: 369
Joined: Thu Mar 01, 2007 10:19 pm
Location: Georgia

Re: Bad idea to buy i-bond now?

Post by dphmd » Thu Aug 08, 2013 7:14 pm

Also, what is the alternative? Money market funds, savings accounts, and CDs pretty much all have lower rates (unless you commit to long-term CDs). Bond funds may have higher rates but can lose value -- not ideal for one's emergency money.

One of the big benefits of I bonds is that if rates skyrocket after 12 months you can always cash them in and buy something else.
Discipline is freedom.

User avatar
joe8d
Posts: 4287
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Bad idea to buy i-bond now?

Post by joe8d » Thu Aug 08, 2013 7:26 pm

To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
All the Best, | Joe

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: Bad idea to buy i-bond now?

Post by Epsilon Delta » Thu Aug 08, 2013 8:12 pm

joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?

User avatar
joe8d
Posts: 4287
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Bad idea to buy i-bond now?

Post by joe8d » Thu Aug 08, 2013 8:15 pm

Epsilon Delta wrote:
joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?
Readily acessible.
All the Best, | Joe

User avatar
tludwig23
Posts: 1660
Joined: Thu Dec 30, 2010 3:27 pm
Location: 48deg46"23"N 122deg28'21"W

Re: Bad idea to buy i-bond now?

Post by tludwig23 » Thu Aug 08, 2013 8:24 pm

joe8d wrote:
Epsilon Delta wrote:
joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?
Readily acessible.
Anything online can quickly become readily inaccessible.
That's what I do: I drink, and I know things. --Tyrion Lannister

jxs705
Posts: 122
Joined: Wed Jul 24, 2013 9:45 am

Re: Bad idea to buy i-bond now?

Post by jxs705 » Thu Aug 08, 2013 8:40 pm

I don't like the fact that i-bond cannot be accessed in the first year. Otherwise I think it is more attractive.
tludwig23 wrote:
joe8d wrote:
Epsilon Delta wrote:
joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?
Readily acessible.
Anything online can quickly become readily inaccessible.

User avatar
Epsilon Delta
Posts: 7430
Joined: Thu Apr 28, 2011 7:00 pm

Re: Bad idea to buy i-bond now?

Post by Epsilon Delta » Thu Aug 08, 2013 9:03 pm

tludwig23 wrote:
joe8d wrote:
Epsilon Delta wrote:
joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?
Readily acessible.
Anything online can quickly become readily inaccessible.
To be fair, new I bonds are also online and could suffer the same issues as an online bank. I can envision an emergency where it would help to have cash or doubloons buried in the backyard, but I can't envision the type of emergency that would take out Chase, Citi, Capitol One and my credit union while leaving Ally or Barclays intact.

Spirit Rider
Posts: 8584
Joined: Fri Mar 02, 2007 2:39 pm

Re: Bad idea to buy i-bond now?

Post by Spirit Rider » Thu Aug 08, 2013 9:03 pm

jxs705 wrote:I don't like the fact that i-bond cannot be accessed in the first year. Otherwise I think it is more attractive.
This is a reason for putting a small percentage of your emergency fund in each year, not a reason for avoiding them altogether. Then eventually they are over five years and there is not even the three month redemption penalty.

jxs705
Posts: 122
Joined: Wed Jul 24, 2013 9:45 am

Re: Bad idea to buy i-bond now?

Post by jxs705 » Thu Aug 08, 2013 9:06 pm

That's true. But it would not be a small percentage for me if I want to max it to 10k.
Spirit Rider wrote:
jxs705 wrote:I don't like the fact that i-bond cannot be accessed in the first year. Otherwise I think it is more attractive.
This is a reason for putting a small percentage of your emergency fund in each year, not a reason for avoiding them altogether. Then eventually they are over five years and there is not even the three month redemption penalty.

User avatar
joe8d
Posts: 4287
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Bad idea to buy i-bond now?

Post by joe8d » Thu Aug 08, 2013 9:06 pm

I don't like the fact that i-bond cannot be accessed in the first year.
Exactlly.
All the Best, | Joe

Spirit Rider
Posts: 8584
Joined: Fri Mar 02, 2007 2:39 pm

Re: Bad idea to buy i-bond now?

Post by Spirit Rider » Thu Aug 08, 2013 9:33 pm

And thus the reason for a tiered approach. I have my emergency fund allocated as follows:

2% cash in a safe
8% in savings at my credit union < 1 mile from my house (higher rate than Ally )
10% in savings at Ally
30% in muni bond fund
50% in IBonds (all over five years)

User avatar
joe8d
Posts: 4287
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: Bad idea to buy i-bond now?

Post by joe8d » Thu Aug 08, 2013 9:38 pm

Spirit Rider wrote:And thus the reason for a tiered approach. I have my emergency fund allocated as follows:

2% cash in a safe
8% in savings at my credit union < 1 mile from my house (higher rate than Ally )
10% in savings at Ally
30% in muni bond fund
50% in IBonds (all over five years)
Thats a good Savings Program with the first 3 componets available for " Emergencies "
All the Best, | Joe

maitrina
Posts: 30
Joined: Thu Aug 02, 2012 8:20 pm

Re: Bad idea to buy i-bond now?

Post by maitrina » Thu Aug 08, 2013 9:41 pm

For me, time is too precious to have my emergency funds spread across five places. I use four.
"I'd like to live like a poor man with lots of money." - Pablo Picasso

grog
Posts: 366
Joined: Sat Jul 20, 2013 1:09 pm

Re: Bad idea to buy i-bond now?

Post by grog » Thu Aug 08, 2013 10:00 pm

According to treasury direct, the rate on them is 1.18%. That is pretty competitive with most one-year CDs, I think.

It is broken up into a fixed rate, currently 0.0%, and double the inflation rate (2x0.59%=1.18%). It seems to me (if I'm understanding how these work) that if you bought now with a zero fixed rate, you'd probably want to cash them out as soon as that rate goes positive again (if you didn't mind the reset on the one-year waiting period). Since they limit purchases to $10,000 a year, if you have purchased them over several years and have, say, $50,000 in I-bonds, are you allowed to roll those over to new I-bonds if the fixed rate improves, or could you only roll $10,000 a year?

User avatar
nedsaid
Posts: 10229
Joined: Fri Nov 23, 2012 12:33 pm

Re: Bad idea to buy i-bond now?

Post by nedsaid » Thu Aug 08, 2013 10:09 pm

I am still buying I-Bonds bit by bit. Not great but does better than money in the bank. You need a microscope to see the interest that my bank pays me.
A fool and his money are good for business.

John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: Bad idea to buy i-bond now?

Post by John3754 » Thu Aug 08, 2013 10:21 pm

grog wrote:Since they limit purchases to $10,000 a year, if you have purchased them over several years and have, say, $50,000 in I-bonds, are you allowed to roll those over to new I-bonds if the fixed rate improves, or could you only roll $10,000 a year?
You could only roll $10k per year.

User avatar
Peter Foley
Posts: 4498
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Bad idea to buy i-bond now?

Post by Peter Foley » Thu Aug 08, 2013 10:37 pm

I-Bonds? Right now I can't think of anything that pays more with less risk except for some high yield checking accounts that require a direct deposit and a number of debit card transactions per month. I-Bonds are fine for asset preservation. Unless there is the possibility that you need access to the cash within a year they are not a bad idea at all.

User avatar
Kalo
Posts: 489
Joined: Sat May 25, 2013 1:01 pm

Re: Bad idea to buy i-bond now?

Post by Kalo » Thu Aug 08, 2013 10:40 pm

tludwig23 wrote:
joe8d wrote:
Epsilon Delta wrote:
joe8d wrote:To me, a real " Emergency Fund " would be in an Online Savings account such as Ally Bank (.84% ) or Barclays ( .90 % ).
Because the banks are backed up by FDIC while nothing backs up the treasury?
Readily acessible.
Anything online can quickly become readily inaccessible.
That's why I keep my money buried in a tin can and the map in my sock.

:P

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.

User avatar
hollowcave2
Posts: 1790
Joined: Thu Mar 01, 2007 3:22 pm
Location: Sacramento, CA

Re: Bad idea to buy i-bond now?

Post by hollowcave2 » Thu Aug 08, 2013 11:03 pm

The rate on the I-bond includes a variable rate based on inflation, so you'll get the variable rates as they reset every 6 months. I don't see the downside of buying an I-bond now as opposed to an uncertain rate later. I'd just buy it.

If you are using it for an emergency fund, just remember that they can't be redeemed for a year, except in disaster areas, and I hope you aren't in one of those.

User avatar
#Cruncher
Posts: 2652
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Bad idea to buy i-bond now?

Post by #Cruncher » Fri Aug 09, 2013 7:29 am

jxs705 wrote:...is it still a good idea to buy i-bond for emergency fund? [emphasis added]
Spirit Rider wrote:I have my emergency fund allocated as follows: ... 50% in IBonds (all over five years) [emphasis added]
While I Bonds being issued now with a 0% fixed do make a good part of an emergency fund; in my opinion ones purchased in the past with a positive fixed rate do not. In today's low interest rate environment, it would be painful to have to part with these to fund an emergency.
grog wrote:the rate on them ... is broken up into a fixed rate, currently 0.0%, and double the inflation rate (2x0.59%=1.18%).
Just so no one's mouth starts to water, the current 1.18% composite rate is the 0% fixed rate plus double the semi-annual inflation rate. I.e., the CPI rose 0.59% from 231.407 in September 2012 to 232.773 in March 2013 (see CPI-U Since 1913).
John3754 wrote:
grog wrote:Since they limit purchases to $10,000 a year, if you have purchased them over several years and have, say, $50,000 in I-bonds, are you allowed to roll those over to new I-bonds if the fixed rate improves, or could you only roll $10,000 a year?
You could only roll $10k per year.
John3754 is correct. However, there is no limit in redeeming I Bonds and using the proceeds to buy something else. For example, one could redeem all $50K; use $10K to buy new I Bonds with a positive fixed rate; and use the remaining $40K to buy TIPS. When the I Bond fixed rate does become positive, it's likely that the real yield on 10-year TIPS will be at least 1% point higher (see Re: TIPS Real Yield vs I Bond Fixed Rate 1999 - 2011).

camaro327
Posts: 249
Joined: Fri Dec 21, 2012 11:04 am

Re: Bad idea to buy i-bond now?

Post by camaro327 » Fri Aug 09, 2013 8:56 am

I believe the Fed has a 2% target for inflation. So your purchasing a variable rate targeted to 2%, which is equivalent to the best 5 year CDs. These are excellent for an EF or replacement for CDs and short term bond funds.

dozer183e
Posts: 46
Joined: Fri May 10, 2013 8:24 pm

Re: Bad idea to buy i-bond now?

Post by dozer183e » Fri Aug 09, 2013 9:04 am

So say one has $20,000 in a MM emergency savings, and wants to convert that to something with a better rate. Two options I see are a 5 year CD at 1.5% and i-bonds currently yielding 1.18%.

Which would you take?

Keep in mind both cases would be purchased like a ladder, in smaller increments over the next couple of years in case some cash is need in that time. After that time the fee to break either would be acceptable. The biggest benefit that I can see to i-bonds is that after 5 years they can just be cashed in no penalty, whereas the CD has to be rolled into another CD, and the need to break can always be there, unless laddered into enough rings so eventually one is always about to mature.
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

sport
Posts: 7185
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Bad idea to buy i-bond now?

Post by sport » Fri Aug 09, 2013 9:48 am

dozer183e wrote:So say one has $20,000 in a MM emergency savings, and wants to convert that to something with a better rate. Two options I see are a 5 year CD at 1.5% and i-bonds currently yielding 1.18%.

Which would you take?

Keep in mind both cases would be purchased like a ladder, in smaller increments over the next couple of years in case some cash is need in that time. After that time the fee to break either would be acceptable. The biggest benefit that I can see to i-bonds is that after 5 years they can just be cashed in no penalty, whereas the CD has to be rolled into another CD, and the need to break can always be there, unless laddered into enough rings so eventually one is always about to mature.
At some banks, the accumulating interest in a CD can be withdrawn without penalty at any time. When the CD matures, the accumulated interest can either be withdrawn, or it becomes part of the principle in the renewal CD.
Jeff

User avatar
TheTimeLord
Posts: 5284
Joined: Fri Jul 26, 2013 2:05 pm

Re: Bad idea to buy i-bond now?

Post by TheTimeLord » Fri Aug 09, 2013 9:56 am

jxs705 wrote:Given the low rate of i-bond now, is it still a good idea to buy i-bond for emergency fund? The rate is so low, although I think the actual inflation is higher than that, and the there is one -year restriction. So it is not attractive to me at all. But cannot think of a better alternative for emergency fund. Any suggestions?
I can tell you I bought some for my emergncy fund this year and will sell and repurchase if the guaranteed portion of the rate goes higher. For several years I had a checking account that paid 4% about 18 months ago they went to 2% then 1% now .75% so I Bonds make sense to me.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

grog
Posts: 366
Joined: Sat Jul 20, 2013 1:09 pm

Re: Bad idea to buy i-bond now?

Post by grog » Fri Aug 09, 2013 10:06 am

#Cruncher wrote: While I Bonds being issued now with a 0% fixed do make a good part of an emergency fund; in my opinion ones purchased in the past with a positive fixed rate do not. In today's low interest rate environment, it would be painful to have to part with these to fund an emergency.
Very true. The first ones issued from 1998 have a 3.4% fixed rate. Plus the variable rate. Can't beat that with a stick.
#Cruncher wrote: Just so no one's mouth starts to water, the current 1.18% composite rate is the 0% fixed rate plus double the semi-annual inflation rate. I.e., the CPI rose 0.59% from 231.407 in September 2012 to 232.773 in March 2013 (see CPI-U Since 1913).
Ah. That's makes more sense. I just saw the formula and figured they must be making a corresponding reduction in the fixed rate to be able to offer that. Maybe for marketing reasons or something (e.g., "Now with double the inflation protection ...").

Carpe
Posts: 211
Joined: Tue Jun 16, 2009 3:38 pm

Re: Bad idea to buy i-bond now?

Post by Carpe » Fri Aug 09, 2013 10:26 am

jxs705 wrote:Given the low rate of i-bond now, is it still a good idea to buy i-bond for emergency fund? The rate is so low, although I think the actual inflation is higher than that, and the there is one -year restriction. So it is not attractive to me at all. But cannot think of a better alternative for emergency fund. Any suggestions?
Without better alternatives for your emergency fund, what's not to like? You can work around the 1 year restriction by building up a holding over a number of years. If and when fixed rates increase, you will have the option to harvest those with lower returns. Slow and steady works in this case. Try to think long term, not just what you can achieve / purchase this year.
Carpe: pick, pluck, pluck off, gather

Spirit Rider
Posts: 8584
Joined: Fri Mar 02, 2007 2:39 pm

Re: Bad idea to buy i-bond now?

Post by Spirit Rider » Fri Aug 09, 2013 10:43 am

#Cruncher wrote:
Spirit Rider wrote:I have my emergency fund allocated as follows: ... 50% in IBonds (all over five years) [emphasis added]
While I Bonds being issued now with a 0% fixed do make a good part of an emergency fund; in my opinion ones purchased in the past with a positive fixed rate do not. In today's low interest rate environment, it would be painful to have to part with these to fund an emergency.
I couldn't agree more. Those IBonds have a 3.4% fixed rate and I would be loathe to part with them even during both of my long term income emergencies. I would sooner part with a body extremity than part with a 3+% IBond and haven't.

In 2002/2004 I was either underpaid or received no pay for over two years (startup situation). There reached a point when I had < $100 in cash. My only two choices were cash-in the IBonds or non-qualified withdrawals from retirement accounts. Luckily this was a period of easy credit. I used refinancing, two 0% on purchase offers, several 0% balance transfer offers with $0/$75 flat fees, including two 0% for life offers.
Those were the days :sharebeer

I would never recommend that anyone depend on absolutely using credit for emergency funds. It could disappear when it is needed most. However, it can be an optional contingency if it is available and makes sense.

yukon50
Posts: 325
Joined: Thu Jan 13, 2011 8:23 pm

Re: Bad idea to buy i-bond now?

Post by yukon50 » Fri Aug 09, 2013 11:23 am

dozer183e wrote:So say one has $20,000 in a MM emergency savings, and wants to convert that to something with a better rate. Two options I see are a 5 year CD at 1.5% and i-bonds currently yielding 1.18%.

Which would you take?

Keep in mind both cases would be purchased like a ladder, in smaller increments over the next couple of years in case some cash is need in that time. After that time the fee to break either would be acceptable. The biggest benefit that I can see to i-bonds is that after 5 years they can just be cashed in no penalty, whereas the CD has to be rolled into another CD, and the need to break can always be there, unless laddered into enough rings so eventually one is always about to mature.

Would probably take the I-Bond. It is good for up to 30 years. There is some upside too. Not too long ago they were yielding 4.6%.

Call_Me_Op
Posts: 6997
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Bad idea to buy i-bond now?

Post by Call_Me_Op » Fri Aug 09, 2013 11:25 am

Epsilon Delta wrote: Because the banks are backed up by FDIC while nothing backs up the treasury?
I hope this is a joke.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Iorek
Posts: 940
Joined: Fri Mar 08, 2013 9:38 am

Re: Bad idea to buy i-bond now?

Post by Iorek » Fri Aug 09, 2013 11:52 am

dozer183e wrote:So say one has $20,000 in a MM emergency savings, and wants to convert that to something with a better rate. Two options I see are a 5 year CD at 1.5% and i-bonds currently yielding 1.18%.

Which would you take?

Keep in mind both cases would be purchased like a ladder, in smaller increments over the next couple of years in case some cash is need in that time. After that time the fee to break either would be acceptable. The biggest benefit that I can see to i-bonds is that after 5 years they can just be cashed in no penalty, whereas the CD has to be rolled into another CD, and the need to break can always be there, unless laddered into enough rings so eventually one is always about to mature.
Another benefit of the i-bond is that for the CD you will get taxed on the interest you accrue each year even if you do not withdraw it, but the i-bond is only taxed on redemption (and in rare circumstances not even then).

digit8
Posts: 611
Joined: Mon Jul 14, 2008 5:26 pm

Re: Bad idea to buy i-bond now?

Post by digit8 » Fri Aug 09, 2013 6:10 pm

dozer183e wrote:So say one has $20,000 in a MM emergency savings, and wants to convert that to something with a better rate. Two options I see are a 5 year CD at 1.5% and i-bonds currently yielding 1.18%.

Which would you take?

Keep in mind both cases would be purchased like a ladder, in smaller increments over the next couple of years in case some cash is need in that time. After that time the fee to break either would be acceptable. The biggest benefit that I can see to i-bonds is that after 5 years they can just be cashed in no penalty, whereas the CD has to be rolled into another CD, and the need to break can always be there, unless laddered into enough rings so eventually one is always about to mature.
I like the split of MMSA's (liquidity and easy access) and Ibonds(inflation protection usually working out to higher rates). It has been quite awhile since the spread between the three was wide enough to make new CD's seem worth the trouble.
"You can't latte yourself to bankruptcy. The bladder won't allow it." | -Katherine Porter

dozer183e
Posts: 46
Joined: Fri May 10, 2013 8:24 pm

Re: Bad idea to buy i-bond now?

Post by dozer183e » Sat Aug 10, 2013 12:32 am

Another CD vs i-bond question.

Assumption:
If I bought a $5,000 5-year CD, and in year 2 I need $1,000, I have to break the whole CD and pay the penalty on the whole thing (ie. 2 month interest on the $5,000). Hoewever if I bought $5,000 of i-bonds, it looks like if I need the $1,000 after 2 years, I could just sell $1,000 and pay the 3 month interest penalty on just that portion I am withdrawing. The rest stays in i-bonds and continues to grow. Is this right?

Trying to figure out if laddering i-bonds into smaller portions makes sense, or just buy a lump sum.
Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.

sport
Posts: 7185
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Bad idea to buy i-bond now?

Post by sport » Sat Aug 10, 2013 12:35 am

dozer183e wrote:Another CD vs i-bond question.

Assumption:
If I bought a $5,000 5-year CD, and in year 2 I need $1,000, I have to break the whole CD and pay the penalty on the whole thing (ie. 2 month interest on the $5,000). Hoewever if I bought $5,000 of i-bonds, it looks like if I need the $1,000 after 2 years, I could just sell $1,000 and pay the 3 month interest penalty on just that portion I am withdrawing. The rest stays in i-bonds and continues to grow. Is this right?

Trying to figure out if laddering i-bonds into smaller portions makes sense, or just buy a lump sum.
If you are concerned about trying to break a large CD, you can always buy a number of smaller ones. For example, instead of a $5000 CD, you can buy five $1000 CDs. Alternatively, some banks may allow partial withdrawal from a CD, where the EWP is only on the amount withdrawn.
Jeff

taegirain3
Posts: 52
Joined: Sun Apr 21, 2013 2:41 pm

Re: Bad idea to buy i-bond now?

Post by taegirain3 » Sat Aug 10, 2013 4:19 am

dozer183e wrote:Another CD vs i-bond question.
Assumption:
If I bought a $5,000 5-year CD, and in year 2 I need $1,000, I have to break the whole CD and pay the penalty on the whole thing (ie. 2 month interest on the $5,000). Hoewever if I bought $5,000 of i-bonds, it looks like if I need the $1,000 after 2 years, I could just sell $1,000 and pay the 3 month interest penalty on just that portion I am withdrawing. The rest stays in i-bonds and continues to grow. Is this right?
That is correct, for the I bonds.

User avatar
Mel Lindauer
Moderator
Posts: 28477
Joined: Mon Feb 19, 2007 8:49 pm
Location: Daytona Beach Shores, Florida
Contact:

Re: Bad idea to buy i-bond now?

Post by Mel Lindauer » Sat Aug 10, 2013 12:04 pm

If you're talking about I Bonds vs one-year CDs for your emergency fund, I'd recommend you ladder whichever one you choose.
Best Regards - Mel | | Semper Fi

robjer
Posts: 27
Joined: Sat Apr 14, 2012 6:28 pm

Re: Bad idea to buy i-bond now?

Post by robjer » Sat Aug 10, 2013 4:07 pm

grog wrote:According to treasury direct, the rate on them is 1.18%. That is pretty competitive with most one-year CDs, I think.

It is broken up into a fixed rate, currently 0.0%, and double the inflation rate (2x0.59%=1.18%). It seems to me (if I'm understanding how these work) that if you bought now with a zero fixed rate, you'd probably want to cash them out as soon as that rate goes positive again (if you didn't mind the reset on the one-year waiting period). Since they limit purchases to $10,000 a year, if you have purchased them over several years and have, say, $50,000 in I-bonds, are you allowed to roll those over to new I-bonds if the fixed rate improves, or could you only roll $10,000 a year?
didn't see an answer to this important question. Answer is you are still limited to whatever the current limits are per year. So based on $10K per year limit for an individual it would take 5 years to get the whole $50K back into I Bonds if you sold them all at once.

jendoe
Posts: 25
Joined: Sat Jun 16, 2012 5:20 pm

Re: Bad idea to buy i-bond now?

Post by jendoe » Sun Aug 11, 2013 1:28 pm

Couple of other tips about ibonds... (just in case you haven't seen these!)

- You get interest for the full month if you hold the ibond on the last day of the month. So, if you buy ibonds near the end of a month... you essentially get to double-dip on interest (you collect interest while the money is in a savings account for most of the month, then you collect interest from the start of the month if you buy the ibond late in the month.) The wiki entry for ibonds mentions this: http://www.bogleheads.org/wiki/I_Savings_Bonds under "Tips for Buying ibonds"

I assume this isn't a *huge* amount of extra money, but it's a way to make your money earn a bit more, for one month anyway!

- Ibonds are also exempt from state/local taxes. If you're looking at a savings account versus ibonds that pay the same, you may come out a little bit ahead if you have high state/local taxes, as the ibond interest is exempt.

- If you're planning to go back to school, you may be able to use the ibond money to pay for it without paying federal taxes too.

- The ibond rates are announced twice a year (May 1, November 1). I don't think anyone knows how the fixed rate is calculated, but the inflation-portion is based on a calculation that uses the (easily available) CPI numbers. Quite a few financial forums/blogs publish updates for these before the government formally announces the new rates (there's a Fatwallet thread for example where somone regularly posts the monthly updates to the CPI - they're announced usually around the middle of the month.)

This means that sometimes around mid-April, you will know the inflation portion of the ibond rate (officially released May 1), and you'll know the inflation portion of the November rate in mid-October. (You *won't* know the upcoming fixed rate.) Since you get the current rate when you buy, you can use this to estimate the one year rate of the ibond before you buy it...

For example: if the current rate is 2% (annual) and the new rate is 1% (annual) and there is a 3 month penalty if you take the money out after 1 year... you'd get something like this for a year:
6 months @ 2% = 1% (annual)
+ 6 months @ 1% = 0.5% (annual)
- 3 months of the last rate (1%) = -0.25%
== 1.25% (if you take the money out after one year).

You can use that to compare to your alternatives, although again, it's not perfect, since you don't know if there will be a change to the fixed rate. If you buy today with a fixed rate of 0, and the next rate includes a fixed rate, you miss out on that.

And... I agree it doesn't make sense to put your entire emergency fund in ibonds all at once, and leave yourself with no emergency funds for a year! Perhaps you could find a way to put a little bit in each month, and slowly grow your ibonds, while keeping some money on the side for emergencies in the near term?

I agree that the current rates aren't really *amazing*, but they're higher than what I'm getting in my online savings... and they only change every six months (versus whenever a bank decides to change them), AND they have an easily available index that they're tied to... again, unlike the banks, where they (afaik) can decide to drop rates at any time, for any reason.

User avatar
telemark
Posts: 2299
Joined: Sat Aug 11, 2012 6:35 am

Re: Bad idea to buy i-bond now?

Post by telemark » Sun Aug 11, 2013 1:39 pm

#Cruncher wrote:While I Bonds being issued now with a 0% fixed do make a good part of an emergency fund; in my opinion ones purchased in the past with a positive fixed rate do not. In today's low interest rate environment, it would be painful to have to part with these to fund an emergency.
Yes, but in a true emergency that would be the least of my worries. Fortunately a true emergency is also unlikely to happen.

Post Reply