Putting Your Emergency Fund In I Bonds?

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rattlenap
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Putting Your Emergency Fund In I Bonds?

Postby rattlenap » Sun Jul 10, 2016 12:00 am

Just wondering what peoples thoughts are if someone were to put the bulk of their EF into I Bonds? Lets say you have 12 months of savings or something. I am not talking all at once since your money would be locked away for an entire year. No, I am actually referring to 25% bands spread over the course of 4 years. Now as far as keeping cash on hand? I'd say keep two months worth of savings in a checking account, but the other 10 months or more go into I Bonds. Any thoughts?

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Re: Putting Your Emergency Fund In I Bonds?

Postby camaro327 » Sun Jul 10, 2016 6:22 am

I think this is a great strategy and savings vehicle to use for your emergency fund. You seem to already understand the 12 month holding period, which is the only drawback.

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nisiprius
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Re: Putting Your Emergency Fund In I Bonds?

Postby nisiprius » Sun Jul 10, 2016 6:40 am

I think it's fine. I consider our own I bonds to be "available" as emergency funds. 1) Once the year is up, they are highly liquid. 2) They are Treasury instruments and surely as safe as anything can be. 3) They can't go down in number-of-dollars value, and they can't go down in CPI-adjusted value.

There are a couple of things to keep in mind, though. Unlike a checking or savings account, you can't really draw on them as "available funds" the same day. I haven't tried it so I don't know what the time lag is between an electronic withdrawal from a Treasury Direct account and having the money show as "available funds" in your bank... I believe it's overnight but don't know for sure.

I'm actually a bit worried about the availability of funds from our paper I bonds, because it's no longer a question (as it once was) of handing them across the counter at our local bank. I think it's currently a nasty process involving mailing things and might take weeks.

The important thing about "emergency funds" is to keep in mind what emergencies you're thinking about, and what your strategy is. The old rules of thumb were, I think, mostly created just to prevent young people from buying individual stocks with everything left from the paycheck after paying the rent. I have yet to see any really good discussion of emergency funds. The proof is that the standard "emergency" is job loss; but if you are worried about job loss, one of the important things in planning is to understand exactly how unemployment benefits work in your state, whether you will get them, how much, and for how long. To put it bluntly, I don't know how you find this out. I found it out myself the hard way (which wasn't really all that hard, as it turned out).

The thing about "emergency funds" is that they should be there if you need them, so they a) should be fairly liquid, b) very safe and certain, and c) shouldn't fluctuate too much in value. Savings bonds meet these criteria.

Some people just plain hate to put money into such boring things and say that in an emergency they can "always" use their home equity lines of credit, or their credit cards. I think this is foolish both of them can, and during 2006-2009 often were, terminated by banks on short notice.
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Re: Putting Your Emergency Fund In I Bonds?

Postby ionisation » Sun Jul 10, 2016 9:40 am

I also use I Bonds as a component of my EF, but I also keep cash in a local bank for immediate availability.

nisiprius wrote:I'm actually a bit worried about the availability of funds from our paper I bonds, because it's no longer a question (as it once was) of handing them across the counter at our local bank. I think it's currently a nasty process involving mailing things and might take weeks.


If this is a concern, why don't you just convert the paper bonds to electronic now? I did and it took a while for the process to complete, but then everything is in one place. . .

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dratkinson
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Re: Putting Your Emergency Fund In I Bonds?

Postby dratkinson » Sun Jul 10, 2016 10:12 am

Electronic I bonds.

I did it for a while and found it to be okay.

Each transaction (buy/redeem electronic bonds) is relatively painless and takes ~2 business days for the ACH to process. So if you do have an emergency, you can get the money relatively quickly.

Some reported having trouble with the TD website, but I never did. Just do things TD's way (use its direction keys, not browser back/forward buttons) and it seems to work as advertised.



Paper I bonds.

If you're going to purchase I bonds, then can play the "paper I bonds refund with fed tax return" game. It raises your annual purchase limit $5K, and more importantly, it makes doing taxes almost fun.
See game rules: https://www.bogleheads.org/wiki/I_savin ... tax_refund

It can be a pain to redeem (any) paper savings bonds locally, and can take a week if you do find a bank/CU that will redeem them.

But if your bank or CU or associated CU will not redeem them, then send them to TD for conversion to electronic format. It is reported that this process can take a few months, so do it early---during the first year when they can not be redeemed---and be done with it.
Last edited by dratkinson on Sun Jul 10, 2016 11:50 am, edited 1 time in total.
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Re: Putting Your Emergency Fund In I Bonds?

Postby digit8 » Sun Jul 10, 2016 10:46 am

nisiprius wrote:Some people just plain hate to put money into such boring things and say that in an emergency they can "always" use their home equity lines of credit, or their credit cards. I think this is foolish both of them can, and during 2006-2009 often were, terminated by banks on short notice.


During the crash I was working at a highly conservative credit union, one that was very careful about doling out the equity lines of credit to the point where our losses were something like 1/10th of the industry average when the damage was all tallied up. All the same, most of my work day for 2007-08 was reviewing these and freezing mass numbers of them. One thing that a shocking number of people don't understand is that their lending institution doesn't just look at the consumers personal finances in those situations- the biggest reason for the freezes was a drop in property values, which the individual had no control over
"No control", in my mind, translates to "not suitable for an emergency fund".

I agree there is a real lack of substantive discussion over EF's- most attempts come down to "there is no right answer" or "this is the only solution, nothing else will do", neither of which is particularly helpful.
I think the problem is, the EF is arguably the most subjective concept in personal finance. There's just too many moving parts in what defines an emergency, let alone the best means to pay for it.

That said, I Bonds with sufficient savings to cover the one year holding period is my personal preference. I like a simple bucket system- monthly deposits to a savings deposit, every 6 months or so I empty that into more I bonds. Having that stable, super safe and inflation protected money set aside for emergencies is a huge comfort to me.
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rattlenap
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Re: Putting Your Emergency Fund In I Bonds?

Postby rattlenap » Wed Aug 03, 2016 8:35 pm

So how does this 3 tier approach sound?

1st Tier 2 months savings: one month kept at home with one month in a checking account

2nd Tier 4 months savings: kept in a high saving account (Ally Bank, etc.)

3rd Extended Tier: all kept in iBonds

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Re: Putting Your Emergency Fund In I Bonds?

Postby radiowave » Wed Aug 03, 2016 8:55 pm

rattlenap wrote:So how does this 3 tier approach sound?

1st Tier 2 months savings: one month kept at home with one month in a checking account

2nd Tier 4 months savings: kept in a high saving account (Ally Bank, etc.)

3rd Extended Tier: all kept in iBonds


I would recommend a bit more in checking. Some of the things you might use emergency funds for can be expensive, like your furnace/boiler bit the dust in the middle of the winter (had that two years ago and my wrist still hurts from writing that check). Consider keeping 2-3 months in checking with direct access or consider a high yield money market account which you can write check. Capital One has a 1% MM account. I think you can write up to 6 checks/mo so that fits the emergency fund need nicely.

I don't know what "one month kept at home " means. If this is cash, well yes having several hundred or a couple thousand in a safe or other good place can work. How much cash do you feel comfortable carrying around (I think there was a recent tread on that topic).

High yield savings accounts have been discussed frequently. You can move money in 2-3 days by ACH transfer, so unless you really need the funds right now (check/cash), that is a good second tier choice.

I don't have any iBonds, but they do seem like a good savings instrument. Short/intermediate term bonds in a taxable account may be another option but don't have the same principal preservation and inflation protection. In a pinch, one could sell some equity funds (e.g. total stock) in a taxable account but that could trigger capital gains. My only concern about the iBonds is you have to deal with Treasury Direct so that adds another layer of complexity. Maybe someone could comment on how easy it is to move money from Treasury Direct vs. ACH transfer say from Ally, AMEX, Discover, etc.

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Re: Putting Your Emergency Fund In I Bonds?

Postby Jack FFR1846 » Wed Aug 03, 2016 10:24 pm

I've used iBonds as an e fund for years. When I need to cash them, I go to my credit union with paper bonds, sign them and have money in my account. I only have paper bonds.
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Re: Putting Your Emergency Fund In I Bonds?

Postby Dollarsign16 » Wed Aug 03, 2016 10:31 pm

Not sure why people keep saying cashing paper I-bonds is a hassle. I cashed some paper bonds in May at the local branch of BofA. No issue whatsoever.

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Re: Putting Your Emergency Fund In I Bonds?

Postby Grt2bOutdoors » Thu Aug 04, 2016 12:06 pm

Dollarsign16 wrote:Not sure why people keep saying cashing paper I-bonds is a hassle. I cashed some paper bonds in May at the local branch of BofA. No issue whatsoever.

KH


In the age of digital convenience, it's too cumbersome to walk to local neighborhood bank branch, they may not have a bank account and have to show various forms of ID, only a certain amount of bonds can be redeemed without a bank account, they get tired of signing their names umpteen times in front of the teller at redemption. :twisted:
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dratkinson
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Re: Putting Your Emergency Fund In I Bonds?

Postby dratkinson » Thu Aug 04, 2016 2:13 pm

rattlenap wrote:So how does this 3 tier approach sound?

1st Tier 2 months savings: one month kept at home with one month in a checking account

2nd Tier 4 months savings: kept in a high saving account (Ally Bank, etc.)

3rd Extended Tier: all kept in iBonds


Food for thought. Recall it being suggested to tap emergency funds in this order: cash back credit card, bank checking/savings/CDs, taxable retirement accounts (minimize capital gains reporting), HELOC (low interest owed), bank loan (higher interest owed), borrow from family/friends (known relationship strain), ..., tax-advantaged retirement accounts (Roth last).

Another idea. Depending upon our federal tax bracket, we can get double-duty use from a muni fund: as part of our bond allocation and as an EF tier.

After learning that most Vanguard muni funds are exempt from IRS 6-mo holding period requirement to protect tax-exempt dividends, I added one as a tier of my (taxable-account) EFs. The short-term and limited-term funds are most frequently recommended due to short duration resulting in price stability (~10-cents/yr price spread). But I decided the yield was too low for me. So now use VWITX (intermediate-term national) as my muni EF tier (higher yield and ~50-cents/yr price spread). If I every use this EF tier, will reassign the EF duty to my VWLTX (long-term national). Why? I much prefer the higher yield (it keeps me from playing rate-chasing games) and I'm not too worried about <$1/yr price fluctuations.
See "Fine points about tax loss harvesting": https://www.bogleheads.org/wiki/Tax_los ... harvesting
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Re: Putting Your Emergency Fund In I Bonds?

Postby Phineas J. Whoopee » Thu Aug 04, 2016 5:39 pm

nisiprius wrote:...
There are a couple of things to keep in mind, though. Unlike a checking or savings account, you can't really draw on them as "available funds" the same day. I haven't tried it so I don't know what the time lag is between an electronic withdrawal from a Treasury Direct account and having the money show as "available funds" in your bank... I believe it's overnight but don't know for sure.
...

As part of your Treasury Direct account you have, like it or not, a Zero Percent Certificate of Indebtedness. I've briefly moved a little money through it (that's what it's meant for). Redemption proceeds show up in the linked bank account on the second business day after the request.

Ignoring holidays:

Request on Monday and it shows up on Wednesday.
Request on Tuesday and it shows up on Thursday.
Request on Wednesday and it shows up on Friday.
Request on Thursday and it shows up on Monday.
Request on Friday and it shows up on Tuesday.
Request on Saturday and it shows up on Tuesday.
Request on Sunday and it shows up on Tuesday.

I've not redeemed any savings bonds so far, but logging in and stepping through the process to the review phase, the last words on the page above the submit and cancel buttons are: The payment destination you provided should be credited within two business days, so I imagine it works the same.

PJW

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Re: Putting Your Emergency Fund In I Bonds

Postby mindboggling » Thu Aug 04, 2016 5:54 pm

As someone who is retired but working part-time I consider I-bonds as a secondary emergency fund. Yes, they are safe and easily liquidated, but right now they are my only investment asset that is indexed for inflation (no SS yet). Of course in theory equities may provide inflation protection, but I'd hate to have to use my I-bonds! My first-line emergency fund is a high-yield savings account.

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Re: Putting Your Emergency Fund In I Bonds?

Postby Geist » Sun Aug 14, 2016 9:56 am

I think that I-Bonds are perfect for an EF. I keep 1 month of expenses in an Ally savings account (just to prevent accessing I-Bonds for a smaller "emergency" event), then the rest is held in I-Bonds that I purchased over the course of a few years.

I-Bonds earn more interest than my Ally savings, and are way more reliable than just about any other option out there. If something comes up where I need access to the EF, I can initially put the expense on a credit card, then I can pull the cash from either Ally or the I-Bonds, both of which gives me access within 48 hours. Perfect.

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Re: Putting Your Emergency Fund In I Bonds?

Postby arsenal_fan » Mon Aug 15, 2016 2:01 pm

Guys, if I want to invest in I Bonds, should I buy them now or should I wait until Nov 1, 2016 before buying them? I plan to buy the maximum $10000 per year since I have some surplus cash. (Don't wish to buy paper I Bonds).

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Re: Putting Your Emergency Fund In I Bonds?

Postby Grt2bOutdoors » Mon Aug 15, 2016 2:45 pm

arsenal_fan wrote:Guys, if I want to invest in I Bonds, should I buy them now or should I wait until Nov 1, 2016 before buying them? I plan to buy the maximum $10000 per year since I have some surplus cash. (Don't wish to buy paper I Bonds).


Buy when you have the cash in hand, but if you prefer, buy $5K now and $5K in November. Personally, I don't believe the fixed rate will rise above the current 0%.
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Re: Putting Your Emergency Fund In I Bonds?

Postby arsenal_fan » Mon Aug 15, 2016 3:56 pm

Grt2bOutdoors wrote:
arsenal_fan wrote:Guys, if I want to invest in I Bonds, should I buy them now or should I wait until Nov 1, 2016 before buying them? I plan to buy the maximum $10000 per year since I have some surplus cash. (Don't wish to buy paper I Bonds).


Buy when you have the cash in hand, but if you prefer, buy $5K now and $5K in November. Personally, I don't believe the fixed rate will rise above the current 0%.


Thanks, I think the fixed rate right now is 0.1%. In that case, buy all 10k then?

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Re: Putting Your Emergency Fund In I Bonds?

Postby GMan82 » Mon Aug 15, 2016 4:57 pm

Fixed rate is 0.1% now with a variable portion currently st 0.16% totaling 0.26%. I bought $5k worth in April and got 1.64% combined rate. If the CPI is rising, then inflation is on the rise, correct? Is it reasonable to believe that the November rate will likely be higher?

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Re: Putting Your Emergency Fund In I Bonds?

Postby Grt2bOutdoors » Mon Aug 15, 2016 7:46 pm

GMan82 wrote:Fixed rate is 0.1% now with a variable portion currently st 0.16% totaling 0.26%. I bought $5k worth in April and got 1.64% combined rate. If the CPI is rising, then inflation is on the rise, correct? Is it reasonable to believe that the November rate will likely be higher?


I would not count on a rise in the fixed rate, and they could always cut that rate to 0, they've done that before. I'd take the $10K now, especially if the OP is planning on purchasing more in the next 6 months or so. We'll know what the new rate will be in early mid October, so you may want to wait until then to decide about "buy now, buy later".
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Re: Putting Your Emergency Fund In I Bonds?

Postby arsenal_fan » Mon Aug 15, 2016 7:59 pm

Grt2bOutdoors wrote:
GMan82 wrote:Fixed rate is 0.1% now with a variable portion currently st 0.16% totaling 0.26%. I bought $5k worth in April and got 1.64% combined rate. If the CPI is rising, then inflation is on the rise, correct? Is it reasonable to believe that the November rate will likely be higher?


I would not count on a rise in the fixed rate, and they could always cut that rate to 0, they've done that before. I'd take the $10K now, especially if the OP is planning on purchasing more in the next 6 months or so. We'll know what the new rate will be in early mid October, so you may want to wait until then to decide about "buy now, buy later".


Thank you Sir. I'll buy $10k in mid October after looking at the new rate. Yes, I also plan to buy $10k for next year.

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Re: Putting Your Emergency Fund In I Bonds?

Postby DaftInvestor » Mon Aug 15, 2016 8:05 pm

arsenal_fan wrote:
Grt2bOutdoors wrote:
GMan82 wrote:Fixed rate is 0.1% now with a variable portion currently st 0.16% totaling 0.26%. I bought $5k worth in April and got 1.64% combined rate. If the CPI is rising, then inflation is on the rise, correct? Is it reasonable to believe that the November rate will likely be higher?


I would not count on a rise in the fixed rate, and they could always cut that rate to 0, they've done that before. I'd take the $10K now, especially if the OP is planning on purchasing more in the next 6 months or so. We'll know what the new rate will be in early mid October, so you may want to wait until then to decide about "buy now, buy later".


Thank you Sir. I'll buy $10k in mid October after looking at the new rate. Yes, I also plan to buy $10k for next year.


If it drops from .1% to 0% you lose $10 a year...if it doubles from .1% to .2% you get an extra whopping $10 ... with the fixed rate this low - it makes little difference whether you buy now or wait until October.

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Re: Putting Your Emergency Fund In I Bonds?

Postby AlohaJoe » Mon Aug 15, 2016 8:34 pm

nisiprius wrote:The important thing about "emergency funds" is to keep in mind what emergencies you're thinking about, and what your strategy is. The old rules of thumb were, I think, mostly created just to prevent young people from buying individual stocks with everything left from the paycheck after paying the rent. I have yet to see any really good discussion of emergency funds.


I missed this thread the first time around, so forgive the delayed response :happy

In 2000 Hatcher wrote "Should households establish emergency funds?"

His answer was: No.

His finding was that unless you expect to have an emergency more frequently than every four years they don't make sense. He assumed a 3-month emergency fund and pointed out that with a longer emergency fund, things looked even worse for the emergency fund holder.

In 2013 Scott et al revisited the question in "Is an All Cash Emergency Fund Strategy Appropriate for All Investors?"

They also found that virtually no one should have an emergency fund. They found that having a six-month emergency fund, on average, resulted in 20% less wealth.

Maintaining the six-month cash reserve strategy translates into a proportionate lower standard of living during retirement


They also show that having an emergency fund actually results in higher risk to rest of your portfolio (well, higher standard deviation at any rate).

They also pointed out that emergency funds usually result in funding shortfalls when there is an emergency.

Scott et al say the wide spread origins of a "3- to 6-month emergency fund" come from Greninger (1996), which was simply a survey of financial advisers. You seem to be raising a similar point: that there seems to be no clear basis for "3- to 6-month rule".

(Both papers also refer to other research on the subject.)

If an emergency fund is supposed to hedge unemployment then it seems like you'd want to use FRED's "mean duration of unemployment" to set your emergency fund size. During 2008-9 the mean peaked at 41 weeks (11 months); right now the mean is 29 weeks (7 months). Of course, are you trying to hedge an average stint of unemployment? Are you comfortable taking the risk of being one of those whose unemployment last longer than average?

Unemployment insurance (in California, at least) will give you $1,800 a month for 6 months.

Of course, your expenses in unemployment aren't likely to be exactly the same as normally. Some things go down (commuting costs). Other things go up (needing to pay for your own health insurance). I haven't seen any research on how this affects the average unemployed person.

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Re: Putting Your Emergency Fund In I Bonds?

Postby Makaveli » Tue Aug 16, 2016 9:39 am

Thanks OP for starting another I-Bonds thread, I notice these from time to time - contemplate purchasing some - get tired of the concept and move on only to come back in 3 months and reconsider it all over again.

At what age was everyone when you purchased your first set of I-Bonds? Happy with that decision? Wish you started earlier? Later?

Question for OP, given the anemic rates we see today why place I-Bonds in Emergency Fund over traditional high-yield savings account?

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Re: Putting Your Emergency Fund In I Bonds?

Postby Engineer250 » Tue Aug 16, 2016 10:41 am

AlohaJoe wrote:They also found that virtually no one should have an emergency fund. They found that having a six-month emergency fund, on average, resulted in 20% less wealth.

Maintaining the six-month cash reserve strategy translates into a proportionate lower standard of living during retirement


They also show that having an emergency fund actually results in higher risk to rest of your portfolio (well, higher standard deviation at any rate).

They also pointed out that emergency funds usually result in funding shortfalls when there is an emergency.


I've never needed mine for a job loss. More recently, I used it because I needed a new roof. It was preferable to replace my roof with cash on hand rather than take out a loan or deal with worse damage by not fixing the roof.

Perhaps it should be renamed contingency fund. Perhaps someone with a sizeable taxable account doesn't need one. But for most of us mere mortals who are just trying to max out our retirement accounts, and don't have any sort of taxable brokerage account we could tap, having some readily accessible cash that I don't have to "sell" anything to access seems like a good thing.

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Re: Putting Your Emergency Fund In I Bonds?

Postby AlohaJoe » Tue Aug 16, 2016 10:51 am

Engineer250 wrote:having some readily accessible cash that I don't have to "sell" anything to access seems like a good thing.


What's wrong with selling?

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Re: Putting Your Emergency Fund In I Bonds?

Postby MrDogg » Tue Aug 16, 2016 11:08 am

I want to buy some electronic I bonds. How do I go about this? Is there a website? Thanks in advance for some help.

Never mind, I found it. Here's the link for others of you: https://www.treasurydirect.gov/indiv/re ... .htm#where
Last edited by MrDogg on Tue Aug 16, 2016 1:13 pm, edited 1 time in total.

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Re: Putting Your Emergency Fund In I Bonds?

Postby Engineer250 » Tue Aug 16, 2016 11:22 am

AlohaJoe wrote:
Engineer250 wrote:having some readily accessible cash that I don't have to "sell" anything to access seems like a good thing.


What's wrong with selling?


Well, let me clarify.

Me (Today): I have no taxable brokerage account. Priority #1 is to max out 401k and max out Roth (or other IRA) and I'm not there yet on either account. I assume withdrawing from an online savings account is preferable to yanking contributions back out of my Roth (which by the way, is so tiny it would not have paid for the roof) or eating a penalty or taking a loan out of my 401k? For the person like me, who is an early saver and is not maxing retirement and does not have a taxable brokerage account, having a contingency fund is a good idea.

Me (Future) or Typical Boglehead: Plowing 18k a year into 401k, 5k into IRA for yearly backdoor Roth, some sort of absurd 15-20k going into a taxable account. Fine, this person can get by with a small "contingency fund" of accessible cash that they might need sooner than the 2-3 days they can sell in their taxable account because they still have thousands of extra cash flow every single month anyways. So fine, this person can have a tiny contingency fund and then "sell" out of their taxable account, if they want :D

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Re: Putting Your Emergency Fund In I Bonds?

Postby dodecahedron » Tue Aug 16, 2016 12:48 pm

Makaveli wrote:Thanks OP for starting another I-Bonds thread, I notice these from time to time - contemplate purchasing some - get tired of the concept and move on only to come back in 3 months and reconsider it all over again.

At what age was everyone when you purchased your first set of I-Bonds? Happy with that decision? Wish you started earlier? Later?

Question for OP, given the anemic rates we see today why place I-Bonds in Emergency Fund over traditional high-yield savings account?


Not the OP, but there are several responses:

If not needed for emergencies or "contingencies," i-bonds are an excellent liquid but long term form of inflation protection (especially relative to current TIPs with negative real rates) and the amount of i-bonds you can buy each year is constrained in a "Use it or lose it" manner. You also get long-term guaranteed protection against deflation in a way that TIPS do not provide. Moreover, they offer tax-deferral (and possibly tax-exemption if used for higher ed expenses down the road and income qualifications apply). Their return is also free of state tax.


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