Should I use I bonds as emergency fund?

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Topic Author
dboeger1
Posts: 1411
Joined: Fri Jan 13, 2017 6:32 pm

Should I use I bonds as emergency fund?

Post by dboeger1 »

Hello fellow Bogleheads,

I realize this is one of those topics that has been discussed quite a bit, but I'm still very new to fixed income in general and find all the wiki pages a bit overwhelming.

2 working spouses, ages 29 and 28
1st baby due later this year

Income:

+$125k his
+$125k hers
=$250k total, give or take bonuses
hers expected to increase soon by unknown amount with promotion

Property:

+$760k home value in HCOL area
-$505k mortgage @ 2.625% 30-year
=$255k equity

+$16k car value

Portfolio:

+$102k his 401k
+$68k her 401k
+$104k his rollover IRA
+$5k her rollover IRA
+$57k his Roth IRA
+$16k her Roth IRA
+$15k his HSA
+$33k his taxable brokerage
=$400k total before future taxes

Cash:

$45k

Net Worth:

$700k excluding car

Annual Expenses:

Measured around $60k after income taxes, so I'll guesstimate $80k with taxes. This may very well change in the near future due to having child(ren).

Asset Allocation:

For all intents and purposes, our non-cash investments are 100% global cap-weight stocks (VTWAX). It varies slightly due to fund choices in some accounts but our target is essentially VTWAX. More on the cash portion below.

Risk Profile:

I have maybe a different take on portfolio risk than many Bogleheads that's based on Maslow's hierarchy of needs. I have SHTF supplies for world-ending scenarios, a cash emergency fund targeting a fixed size of approximately $40k for sudden financial emergencies calling for quick access to cash, and then all other investments are aimed at maximizing return over a 30+-year time horizon that would put us retiring at approximately 60 years old. Our intention is to "retire early" (more like pursue personal business opportunities) if/when we feel comfortable doing so, but we are prepared to work through a long downturn if needed given low yields, so we are prioritizing total return rather than a specific early retirement date. I realize there's a school of thought that the total portfolio should serve as the emergency fund, but I mostly disagree at this stage of our accumulation phase. I've had a fair number of large expenses sneak up on me where I needed money almost immediately and it wasn't going to be available from investments in the necessary time frame.

Question:

The thing is, I've kind of let that cash amount drift upwards over time, not explicitly intentionally but I was okay with it in recent years because of family health scares and buying our house last year. I also took advantage of some bank account signup bonuses with it, although taxes do eat up a significant portion of those. However, having settled into our home and not seeing as much potential for sudden expenses to sneak up like before, I'd like to reduce the cash drag by optimizing a portion of the emergency fund for less immediate access. Here's what I'm looking for in rough order of importance:

-Principal protection
-Short-but-not-immediate-term access, let's say 1-2 weeks at most
-Ideally tax-efficient although it's ultimately a matter of total return; we live in CA so fairly high state taxes and may move out in retirement
-Ideally higher yield than the 2.625% on the mortgage but not strictly necessary
-Willing to accept some temporary lock-up period to get those benefits longer term

I did some searching and I think I-Bonds fit what I'm looking for. I've seen some topics on here with people claiming to use them as emergency funds after a 1-year holding period, which I think is reasonable. I also don't mind the 3-month penalty in the 1st 5 years if I indeed need the money for an emergency, as the hope is we never need to use it. Outperforming savings accounts and tax deferral are pluses. The cherry on top is the recent announcement of a higher rate coming up in May. I realize it's not permanent, but getting a nice rate above our mortgage interest in the 1st 6 months seems like a no-brainer. Am I correct in understanding that I-Bonds would be strictly better than cash in a savings account after the 1st year? Are there any pitfalls or better alternatives I should consider given our circumstances and our desire for a slightly less liquid but higher-yielding portion of our emergency fund? In particular, I'm wondering if anybody just keeps something like a total bond fund as an emergency fund, either in taxable or tax-advantaged. I would think the upcoming jump in I-Bond rate would offer somewhat of a timing opportunity for at least the 1st year with the possibility of trading up later if a general bond fund has higher yields. It looks like I-Bonds will be at 3.54% yield-tax-deferred in May while whereas I think 30-year Treasuries are at 2.265% taxable with no principal protection. Is it normally the case that I-Bonds yield higher than 30-year Treasuries? If so, is that because of purchase limits? I would have though I-Bonds would yield lower given their other benefits. I guess they wouldn't be great if yield growth outpaced CPI growth and Treasuries caught up, but even then, I-Bonds aren't permanent commitments, so it seems like a no-brainer to somewhat time the bond market with them since there's minimal commitment once they start underperforming. I'm thinking we might buy up to the $20k limit for both of us, and then keep another $20k in cash as our immediate emergency fund.
Last edited by dboeger1 on Wed Apr 21, 2021 8:18 pm, edited 1 time in total.
SnowBog
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Re: Should I use I bonds as emergency fund?

Post by SnowBog »

I think you understand them well enough. And I think I Bonds might be the right option as well.

My only concern is with a baby on the way, commiting 50% of your avaliable cash to I Bonds that you can't touch for a year. Personally, I'd want more flexibility and liquidity than that.

When I started investing in I Bonds, it was with "extra" money - I didn't change the amount of cash I held. When the first year was past the one year mark, then I invested the 2nd year fund so that I always had the same "liquid" amount available if needed (I didn't count I Bonds < 12 months as liquid).
SnowBog
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Re: Should I use I bonds as emergency fund?

Post by SnowBog »

Completely unrelated to your post, but I'd also recommend thinking about consolidating your rollover IRA's into your 401k's if allowed and if the plans are decent.

At some point you may want to make Backdoor Roth contributions, and those IRA's will be in the way...
Topic Author
dboeger1
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Re: Should I use I bonds as emergency fund?

Post by dboeger1 »

SnowBog wrote: Wed Apr 21, 2021 9:36 am My only concern is with a baby on the way, commiting 50% of your avaliable cash to I Bonds that you can't touch for a year. Personally, I'd want more flexibility and liquidity than that.

When I started investing in I Bonds, it was with "extra" money - I didn't change the amount of cash I held. When the first year was past the one year mark, then I invested the 2nd year fund so that I always had the same "liquid" amount available if needed (I didn't count I Bonds < 12 months as liquid).
Yeah, I was thinking the same thing. I front-load my 401k each year and that's due to max out next pay period so I should have some extra cash coming in soon that I can use for that purpose.
SnowBog wrote: Wed Apr 21, 2021 9:38 am Completely unrelated to your post, but I'd also recommend thinking about consolidating your rollover IRA's into your 401k's if allowed and if the plans are decent.

At some point you may want to make Backdoor Roth contributions, and those IRA's will be in the way...
That is part of the plan. I intended to do it early last year but the market was so volatile I didn't want to end up out of the market during a short-lived spike. I also have access to Mega Backdoor Roth 401k which has provided us enough Roth space without needing to roll those over into the 401ks. I should probably take care of them this year though seeing as how the market seems to be a bit more stable and I don't know if that option will always be available to us.
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emlowe
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Re: Should I use I bonds as emergency fund?

Post by emlowe »

The only real downside to I-Bonds (other than the 12 month period) IMO is just the mechanics of using the TreasuryDirect site. You have to log into your account, purchase the bonds, then (ideally) give transact rights to your spouse. Then your spouse has to login into their account, make their own purchase, and then also give transact rights to you. So it's just a little cumbersome. You can also use a trust to make additional purchases, but you now have more accounts to manage.

Both these accounts can be sourced from the same joint savings/checking account though.

The part about transact rights allows you or your spouse the ability to sell any/all the bonds from one account, so this makes redeeming the bonds a little easier.

FYI, I'll note that you can also access your Roth contributions at any time penalty-free - so you could always purchase your I-Bonds and during the 12-month lockout period plan on using Roth contributions in the event of a real emergency.
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mrpotatoheadsays
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Re: Should I use I bonds as emergency fund?

Post by mrpotatoheadsays »

dboeger1 wrote: Tue Apr 20, 2021 11:08 pm
Property:

+$760k home value in HCOL area
-$505k mortgage @ 2.625% 30-year
=$265k equity

+$16k car value

Portfolio:

+$102k his 401k
+$68k her 401k
+$104k his rollover IRA
+$5k her rollover IRA
+$57k his Roth IRA
+$16k her Roth IRA
+$15k his HSA
+$33k his taxable brokerage
=$400k total before future taxes

Cash:

$45k

Net Worth:

$710k excluding car
706 - 505 = $255k equity.

255 + 400 + 45 - 505 = $195k net worth (excluding car).

An emergency fund it is not an investment; keep it in cash or a short-term, liquid, no-penalty instrument that you can access immediately in an emergency. Yes, it's okay to put cash under your mattress... or, better, in a fire-proof safe.
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anon_investor
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Re: Should I use I bonds as emergency fund?

Post by anon_investor »

emlowe wrote: Wed Apr 21, 2021 11:59 am The only real downside to I-Bonds (other than the 12 month period) IMO is just the mechanics of using the TreasuryDirect site. You have to log into your account, purchase the bonds, then (ideally) give transact rights to your spouse. Then your spouse has to login into their account, make their own purchase, and then also give transact rights to you. So it's just a little cumbersome. You can also use a trust to make additional purchases, but you now have more accounts to manage.

Both these accounts can be sourced from the same joint savings/checking account though.

The part about transact rights allows you or your spouse the ability to sell any/all the bonds from one account, so this makes redeeming the bonds a little easier.

FYI, I'll note that you can also access your Roth contributions at any time penalty-free - so you could always purchase your I-Bonds and during the 12-month lockout period plan on using Roth contributions in the event of a real emergency.
I am going to be honest. The 1-2 minute it takes me to give transaction rights and for my spouse to give me transaction rights once a year when we buy I Bonds, its not a big deal.
Topic Author
dboeger1
Posts: 1411
Joined: Fri Jan 13, 2017 6:32 pm

Re: Should I use I bonds as emergency fund?

Post by dboeger1 »

mrpotatoheadsays wrote: Wed Apr 21, 2021 12:19 pm
dboeger1 wrote: Tue Apr 20, 2021 11:08 pm
Property:

+$760k home value in HCOL area
-$505k mortgage @ 2.625% 30-year
=$265k equity

+$16k car value

Portfolio:

+$102k his 401k
+$68k her 401k
+$104k his rollover IRA
+$5k her rollover IRA
+$57k his Roth IRA
+$16k her Roth IRA
+$15k his HSA
+$33k his taxable brokerage
=$400k total before future taxes

Cash:

$45k

Net Worth:

$710k excluding car
706 - 505 = $255k equity.

255 + 400 + 45 - 505 = $195k net worth (excluding car).

An emergency fund it is not an investment; keep it in cash or a short-term, liquid, no-penalty instrument that you can access immediately in an emergency. Yes, it's okay to put cash under your mattress... or, better, in a fire-proof safe.
Whoops on the first one. As for the second one, why would I subtract mortgage debt again after already doing it to calculate equity? If I wanted to subtract 505 still, then the first 255 should be 760, and still come out to around 700k. I better not have a <200k net worth since just my house down payment was more than that, lol.
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mrpotatoheadsays
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Re: Should I use I bonds as emergency fund?

Post by mrpotatoheadsays »

dboeger1 wrote: Wed Apr 21, 2021 12:59 pm Whoops on the first one. As for the second one, why would I subtract mortgage debt again after already doing it to calculate equity? If I wanted to subtract 505 still, then the first 255 should be 760, and still come out to around 700k. I better not have a <200k net worth since just my house down payment was more than that, lol.
You're correct.

"Equity is the difference between what you owe on your mortgage and what your home is currently worth."

You owe 505. The home is worth 760. Therefore, equity is 255.

"Net worth is the value of the assets a person owns, minus the liabilities they owe." Home equity is irrelevant; this and the error in subtraction obviously sent me off on a tangent.

Your assets are 1205 (not including car).
760 in property (home)
400 in 401k, IRA, HSA and taxable portfolio
45 in cash

Your liabilities are 500.
505 in home mortgage

net worth = (1205 - 505) = $700k (not including car).


If you're going to buy I-bonds directly from the Treasury, consider this instead: Vanguard Short-Term Inflation-Protected Securities Index Admiral (VTAPX).
calwatch
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Re: Should I use I bonds as emergency fund?

Post by calwatch »

I bonds pay much higher interest and are tax deferred. Is $25,000 sufficient for three to six months expenses? Could you possibly take out a credit card with a balance transfer to bridge yourself over a nine to 12 month period if needed, given your high income? You also don't have to put all of it at once - maybe $10,000 this month and $10,000 in December.
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leeks
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Re: Should I use I bonds as emergency fund?

Post by leeks »

anon_investor wrote: Wed Apr 21, 2021 12:49 pm
emlowe wrote: Wed Apr 21, 2021 11:59 am The only real downside to I-Bonds (other than the 12 month period) IMO is just the mechanics of using the TreasuryDirect site. You have to log into your account, purchase the bonds, then (ideally) give transact rights to your spouse. Then your spouse has to login into their account, make their own purchase, and then also give transact rights to you. So it's just a little cumbersome. You can also use a trust to make additional purchases, but you now have more accounts to manage.

Both these accounts can be sourced from the same joint savings/checking account though.

The part about transact rights allows you or your spouse the ability to sell any/all the bonds from one account, so this makes redeeming the bonds a little easier.

FYI, I'll note that you can also access your Roth contributions at any time penalty-free - so you could always purchase your I-Bonds and during the 12-month lockout period plan on using Roth contributions in the event of a real emergency.
I am going to be honest. The 1-2 minute it takes me to give transaction rights and for my spouse to give me transaction rights once a year when we buy I Bonds, its not a big deal.
Treasury direct was a complete pain for us to set up. It has been years so I don't remember why, but it involved something called a "medallion signature" (which I have never heard of needing in any other context) and, since we did not use a local bank, it was an annoying and difficult process to find a way to get one. It was easier to make a downpayment on an out-of-state home purchase than it was to purchase our first set of I-bonds. We only buy them in my name as primary owner because it seems too annoying to set up another account for my husband.

That being said, we currently have $40K emergency fund in Ibonds and will probably add another $10k next month. Keeping up with inflation via Ibonds is superior to other options for cash right now so we are pleased with it. Also, since we don't see the money mixed with other cash/money market savings in our bank or Vanguard accounts, it helps with the psychology of being "untouchable" funds unless there is an actual emergency. I do login once per month to ensure it is still there (and to make sure I don't forget how to use the TreasuryDirect login).
Topic Author
dboeger1
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Re: Should I use I bonds as emergency fund?

Post by dboeger1 »

mrpotatoheadsays wrote: Wed Apr 21, 2021 5:11 pm
dboeger1 wrote: Wed Apr 21, 2021 12:59 pm Whoops on the first one. As for the second one, why would I subtract mortgage debt again after already doing it to calculate equity? If I wanted to subtract 505 still, then the first 255 should be 760, and still come out to around 700k. I better not have a <200k net worth since just my house down payment was more than that, lol.
You're correct.

"Equity is the difference between what you owe on your mortgage and what your home is currently worth."

You owe 505. The home is worth 760. Therefore, equity is 255.

"Net worth is the value of the assets a person owns, minus the liabilities they owe." Home equity is irrelevant; this and the error in subtraction obviously sent me off on a tangent.

Your assets are 1205 (not including car).
760 in property (home)
400 in 401k, IRA, HSA and taxable portfolio
45 in cash

Your liabilities are 500.
505 in home mortgage

net worth = (1205 - 505) = $700k (not including car).


If you're going to buy I-bonds directly from the Treasury, consider this instead: Vanguard Short-Term Inflation-Protected Securities Index Admiral (VTAPX).
What's attractive about VTAPX? I mean that seriously, I'm so new to fixed income and find equities much more intuitive because there's no notion of relating them to inflation or central bank rates. From what research I did, it seemed like TIPS were offering substantially negative real yields and don't have the tax benefits or principal protection of I-Bonds. Is there a reason I should be looking into bond funds? I do conceptually like the idea of picking an appropriate bond fund and letting more knowledgeable managers handle the details for me, but I just didn't think there was anything that could compete with the upcoming 3.54% yield of I-Bonds in the short term. As far as I can tell, even if I wanted something else later, I would likely come out ahead holding I-Bonds for 1 year starting with 6 months at 3.54% and then trade for the other stuff once I can sell it. More than likely though, I'd probably just continue holding it as an emergency fund tier.
bhough
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Re: Should I use I bonds as emergency fund?

Post by bhough »

OP,

I vote direct purchasing of I-bonds from treasurydirect. In a bond fund, they decide when to sell and realize capital gains. There may also be interest income you don't want. With an individual I-bond, taxes are deferred until you want to realize the interest. It can be from year 2 to year 30. I'd buy $25,000 every year until you can't anymore as the bond part of your portfolio. I'd also keep 3 months of cash in a savings account (or buried safe, whatever your level of comfort is regarding "access"). The treasurydirect site is easy to use once you get used to it and there are no transaction costs. This is one of the few subsidies the government is giving to rich people and i'm worried it will be gone soon (phased out for incomes over x dollars,..). Good luck!

b
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Re: Should I use I bonds as emergency fund?

Post by KlangFool »

OP,

You need more CASH. Not less CASH with a baby coming. As a first-time parent, you would be surprised with a lot of expenses.

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MrJedi
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Re: Should I use I bonds as emergency fund?

Post by MrJedi »

I would just ignore them for now because your life is going to change quite a bit in the next year, no need to add more complication.

I doubt the fixed rate of I bond is going to bounce much off of zero if at all any time soon, so it's not like you are missing out on much of an opportunity to lock in on an attractive fixed rate component for the long term.
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mrpotatoheadsays
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Re: Should I use I bonds as emergency fund?

Post by mrpotatoheadsays »

dboeger1 wrote: Wed Apr 21, 2021 6:38 pm What's attractive about VTAPX? I mean that seriously, I'm so new to fixed income and find equities much more intuitive because there's no notion of relating them to inflation or central bank rates. From what research I did, it seemed like TIPS were offering substantially negative real yields and don't have the tax benefits or principal protection of I-Bonds. Is there a reason I should be looking into bond funds? I do conceptually like the idea of picking an appropriate bond fund and letting more knowledgeable managers handle the details for me, but I just didn't think there was anything that could compete with the upcoming 3.54% yield of I-Bonds in the short term. As far as I can tell, even if I wanted something else later, I would likely come out ahead holding I-Bonds for 1 year starting with 6 months at 3.54% and then trade for the other stuff once I can sell it. More than likely though, I'd probably just continue holding it as an emergency fund tier.
VTAPX: Buy as much as you want.
I-Bonds: You can only buy electronically $10,000/yr.

VTAPX: Sell whenever you want.
I-Bonds: Cannot sell within the first year.

VTAPX: Sell with no penalty.
I-Bonds: Sell within 5 years and pay a penalty of the last three months of interest.

VTAPX: Has a built-in ladder of bonds ranging in duration 1 to 5 years.
I-Bonds: You have to build you own ladder.

VTAPX: Produces dividends forever.
I-Bonds: Produces interest for 30 years only.


You're making emergency funds too complex. Again, emergency funds are not investments. Any place you can securely put this money, easily access it and not lose it is good enough. VTAPX can obviously be replaced with any money market or short-term bond fund. As your net worth grows, you'll realize that you don't even need an something partitioned as an "emergency fund".
SnowBog
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Re: Should I use I bonds as emergency fund?

Post by SnowBog »

MrJedi wrote: Wed Apr 21, 2021 8:23 pm I would just ignore them for now because your life is going to change quite a bit in the next year, no need to add more complication.

I doubt the fixed rate of I bond is going to bounce much off of zero if at all any time soon, so it's not like you are missing out on much of an opportunity to lock in on an attractive fixed rate component for the long term.
But the alternative is letting $40k lose value to inflation as savings accounts aren't keeping up with inflation.

That said, as I mentioned in prior post (and others like KlangFool and you referenced), having a child might through some unexpected costs/changes OP's way.

I wouldn't recommend "lowering" cash, or doing some of the other suggestions like using credit cards as a bridge, or tapping into Roth accounts. IMHO as much as I like I Bonds, they aren't worth taking in any of those risks...

Instead, I still recommend OP looking at I Bonds only if/when they have excess cash (letting them keep their current cash holdings). With high income and high savings rate, they should end up with spare cash. And if they have higher then expected expenses with a child on the way (car seats, cribs, etc.) and don't have funds left for I Bonds, well it's completely OK if they don't buy I Bonds this year. (If/when OP has the excess cash, do it then...)
JBTX
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Re: Should I use I bonds as emergency fund?

Post by JBTX »

Yes, ibonds make sense in this situation. I'd go ahead and open accounts for both, just to get it done. Then I'd keep a base amount in cash, and any incremental put in ibonds. Perhaps $30k cash base, $10k ibonds in May, and when you accumulate another $10k those into ibonds, etc. You can space your purchases out such that you will never have too long with more than $10k of ibonds inaccessible.

You don't have to rush into anything. Get the accounts set up, put a little bit in over the next 6 months, and proceed from there.
SnowBog
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Re: Should I use I bonds as emergency fund?

Post by SnowBog »

Added some extra context/comments:
mrpotatoheadsays wrote: Wed Apr 21, 2021 9:53 pm
dboeger1 wrote: Wed Apr 21, 2021 6:38 pm What's attractive about VTAPX? I mean that seriously, I'm so new to fixed income and find equities much more intuitive because there's no notion of relating them to inflation or central bank rates. From what research I did, it seemed like TIPS were offering substantially negative real yields and don't have the tax benefits or principal protection of I-Bonds. Is there a reason I should be looking into bond funds? I do conceptually like the idea of picking an appropriate bond fund and letting more knowledgeable managers handle the details for me, but I just didn't think there was anything that could compete with the upcoming 3.54% yield of I-Bonds in the short term. As far as I can tell, even if I wanted something else later, I would likely come out ahead holding I-Bonds for 1 year starting with 6 months at 3.54% and then trade for the other stuff once I can sell it. More than likely though, I'd probably just continue holding it as an emergency fund tier.
VTAPX: Buy as much as you want.
I-Bonds: You can only buy electronically $10,000/yr. per person + $5k via Tax refunds is $25k/couple (more with trust accounts)
But buy for a few years, and you can grow a sizable amount...


VTAPX: Sell whenever you want.
I-Bonds: Cannot sell within the first year.

VTAPX: Sell with no penalty.
I-Bonds: Sell within 5 years and pay a penalty of the last three months of interest. which will still come out significantly ahead of other "cash" type options

VTAPX: Has a built-in ladder of bonds ranging in duration 1 to 5 years.
I-Bonds: You have to build you own ladder. A "ladder" is not required. You can build one if you want. And if you end up buying over multiple years to acquire as much as you want, you'll effectively have a ladder.

VTAPX: Produces dividends forever.
I-Bonds: Produces interest for 30 years only. Electronic I Bonds automatically are redeemed at maturity (30 years), and you can optionally automatically purchase a new bond in its place to keep interest going forever (but you need to set this up after the 1 year minimum holding period)
And I'd add:

VTAPX: Price fluctuates - presumably based on interest rate changes and market demand (although in fairness VTAPX seems fairly stable between $24 - $26 over the past nearly 12 years)
I-Bonds: Price does not change - $1 remains $1 the only change is accrued interest (like "cash" in a savings account)

VTAPX: Requires taxes be paid annually if held in taxable, as well as an any "gains" when sold (although as noted above unlikely to have meaningful gains).
I-Bonds: By default taxes are deferred and only paid when sold. This effectively extends "tax-deferred" space, ideal for those with high incomes (and high taxes) who expect to be in lower tax brackets when they redeem I Bonds.
mrpotatoheadsays wrote: Wed Apr 21, 2021 9:53 pm You're making emergency funds too complex. Again, emergency funds are not investments. Any place you can securely put this money, easily access it and not lose it is good enough. VTAPX can obviously be replaced with any money market or short-term bond fund. As your net worth grows, you'll realize that you don't even need an something partitioned as an "emergency fund".
The above I fully agree with. I no longer have an "emergency fund". And I no longer treat my "cash" separately from the rest of my portfolio. Instead, I've just decided that I want to keep X in cash as part of my fixed income allocation.

But to the broader point, there's no "need" to complicate things with I Bonds. I think they are a better option, and worth the extra steps for our family. But you'll be completely fine never owning I Bonds as well...
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emlowe
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Re: Should I use I bonds as emergency fund?

Post by emlowe »

mrpotatoheadsays wrote: Wed Apr 21, 2021 9:53 pm
VTAPX: Buy as much as you want.
I-Bonds: You can only buy electronically $10,000/yr.

VTAPX: Sell whenever you want.
I-Bonds: Cannot sell within the first year.

VTAPX: Sell with no penalty.
I-Bonds: Sell within 5 years and pay a penalty of the last three months of interest.

VTAPX: Has a built-in ladder of bonds ranging in duration 1 to 5 years.
I-Bonds: You have to build you own ladder.

VTAPX: Produces dividends forever.
I-Bonds: Produces interest for 30 years only.
VTAPX: dividends are taxable every year state and fed
I-Bonds: state tax-free, fed tax-deferred. Can be used fed tax-free for education with AGI limits

VTAPX: Can lose money (total return was negative for 2013, 2014, & 2015)
I-Bonds: Can not lose money, the principal is always returned

VTAPX: Projected 12-month dividend yield: 0.89% (before taxes) (dividendinvestor.com estimate)
I-Bonds: Projected first-year dividend: Buy in May minimum of 1.77% (tax-deferred). Buy in April 2.61% (tipswatch.com estimate)
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mrpotatoheadsays
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Re: Should I use I bonds as emergency fund?

Post by mrpotatoheadsays »

emlowe wrote: Wed Apr 21, 2021 10:50 pm VTAPX: dividends are taxable every year state and fed
I-Bonds: state tax-free, fed tax-deferred. Can be used fed tax-free for education with AGI limits
This statement is false.

Some States do not have a tax system while most other States exempt dividends derived from Treasuries.

For example, "If the mutual fund has at least 50% of its assets invested in tax-exempt U.S. obligations and/or in California or its municipal obligations, that amount of dividend is exempt from California tax." These obligations include "U.S. Treasury bills, notes, and bonds. Any other bonds or obligations of the United States and its territories."

Every year, Vanguard produces a document detailing "U.S. government obligations information" for its funds to help you properly report your state and local tax liability.
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