Ibonds for Emergency Fund

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FishTaco
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Ibonds for Emergency Fund

Post by FishTaco » Thu Mar 26, 2020 7:54 am

Bogleheads,

Do you think it is reasonable to keep Emergency Fund monies in Ibonds? I know about the redemption limitations, but I'm referring to those that can now be easily redeemed. Also, would you still consider these funds as part of your bond allocation when calculating AA?

I know there is going to be a wide range of opinions and that it comes down to personal preference, but I was just wondering what others thought of this.

Thanks
FT

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JoMoney
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Re: Ibonds for Emergency Fund

Post by JoMoney » Thu Mar 26, 2020 8:04 am

I think they might be the best "emergency fund" (after the 1 year min holding period). They don't rely on a "market" to find a buyer, they're protected against inflation (and deflation), direct ownership of the security (not through a broker holding in your name), tax deferred interest - state tax free, and explicit full faith and credit of U.S. Government backing.

Everything has some sort of risk / trade off though, some of the vulnerabilities to a Series I Savings Bond emergency fund:
The "emergency" needs to be able to wait for the ACH transfer period (about 3 days) to get the money.
Your power/network access needs to be working to initiate the transfer.
Consumer protections from fraud/theft seem to be stronger in individual bank or even brokerage accounts (but those have other downsides of there own ... it might be worthwhile to have a little bit a couple places for different types of "emergencies", including some cash on hand).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Jack FFR1846
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Re: Ibonds for Emergency Fund

Post by Jack FFR1846 » Thu Mar 26, 2020 8:16 am

I have a large amount of paper savings bonds. Today's value of them all is around $376k with another $5k coming from my federal refund. With paper, I can bring them to my credit union and cash them for immediate availability. I've cashed as much as $50k in a single visit.

I started using bonds as a savings account, back when the limit was $30k per person and you could cash them in 6 months. I remember specifically cashing some bonds when buying a car. Of course now, there are more limits and they need to wait a year to cash.

I consider them to be part of my bond allocation, although they don't act like bond funds. This has been highlighted to me during the recent downturn, where bonds have moved all over. First rising then falling. The savings bonds, of course simply rise slowly.

Added benefits are that federal tax on the interest is deferred (if you want) and there is no state tax when cashing. You *may* be able to take advantage of educational use, removing all taxes on interest.

There is a calculator tool on treasury direct where you can input your bonds and then print out and/or save the file to your own storage, where ever that is.

I don't hold any electronic bonds and won't. It was a decade ago, but when my dad passed, it took my mom and me on the phone with TD for many hours to cash 2 $50 made out to my kids. If these were paper, it would have been 3 minutes at my credit union.
Bogle: Smart Beta is stupid

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hand
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Re: Ibonds for Emergency Fund

Post by hand » Thu Mar 26, 2020 8:23 am

Jack FFR1846 wrote:
Thu Mar 26, 2020 8:16 am
I have a large amount of paper savings bonds. Today's value of them all is around $376k with another $5k coming from my federal refund. With paper, I can bring them to my credit union and cash them for immediate availability. I've cashed as much as $50k in a single visit.
I also use I Bonds as emergency fund, but am wondering if the in-person redemption requirement represents a heretofore unrecognized risk.

I'm not selling my I Bonds, but may divirsify a bit when I add to my emergency fund.

tindel
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Re: Ibonds for Emergency Fund

Post by tindel » Thu Mar 26, 2020 9:11 am

I generally like Ibonds for most of the reasons already described.

Unfortunately, I was really turned off on them when I tried to buy some a while back near the deadline of when the fixed rate was still 0.5% and was locked out of my account because they wanted me to verify my identity... it took two weeks to unlock the account and required a signature of someone at my bank. By the time everything got cleared up, the 0.5% fixed rate was in the past and I was out of luck. I realized that I may have just as much issue trying to get my money out of Treasury Direct if I ever need to do so in a hurry. So I've stopped investing new money at TD altogether. And the amount of money I do have there just doesn't seem worth keeping the accounts open.

Not to mention that it's two more accounts to keep track of (mine and my wife's) since they don't have joint accounts.

bigskyguy
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Re: Ibonds for Emergency Fund

Post by bigskyguy » Thu Mar 26, 2020 9:13 am

Our emergency fund is I-bonds. We have held them for 20 years (yes they’re all 3% yield), and they’ve grown to nearly 3 years of base living expenses (when coupled with SS). Looking back, it may be the best single investment we have ever made.
If I were starting fresh today, even with rates so low, I’d still do it. They are such a different investment instrument that nothing compares for safety (inflation and deflation) and predictability.

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emlowe
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Re: Ibonds for Emergency Fund

Post by emlowe » Thu Mar 26, 2020 11:09 am

I can think of 4 downsides:

a) limited amount you can purchase per year (without creating multiple trusts etc)
b) 1 year holding period
c) having to deal with Treasury Direct
b) ACH wait times

That said, the wife and I started about 4 years ago putting the maximum in each year as a E-fund and bond "floor" if you will. There aren't many inflation-protected investment instruments and coupled with the tax-deferment and safety it is almost the perfect e-fund vehicle.

As long as you can accept the drawbacks. I will say dealing with TreasuryDirect is likely the biggest downside - it is better than it used to be (when the USPS mailed you the double-super-secret decoder card) - but it's still painful compared with your typical bank or brokerage.
Ferri Core 4: 40% Bonds | 6% Reit | 18% Total i18n | 36% Total US

Coltrane75
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Re: Ibonds for Emergency Fund

Post by Coltrane75 » Thu Mar 26, 2020 11:28 am

iBonds & Emergency Fund:
I think its more than reasonable to put your emergency fund in iBonds. I agree with others that they are great for it. I've been using them for the past 3 years and have been gradually transitioning my fund to iBonds.

iBonds & Bond Allocation:
I don't count them towards a bond allocation. I don't use the method of looking at all my money as one portfolio however. I just see them as my e-fund with flexibility that allows them to be used for other purposes if needed.

Topic Author
FishTaco
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Re: Ibonds for Emergency Fund

Post by FishTaco » Thu Mar 26, 2020 11:37 am

Thanks so much for everyone's input.

I really like the idea of having a small amount in paper Ibonds too. I'll try to get some this year when I file my taxes.

FT

mbasherp
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Re: Ibonds for Emergency Fund

Post by mbasherp » Thu Mar 26, 2020 4:37 pm

I think I bonds are a perfect vehicle for anyone wants a constant floor of an emergency fund. It is highly inflation/deflation resistant and as safe as an FDIC insured bank account. We transitioned 3 months of our EF over to I bonds some time ago and I like knowing that no matter what our other cash accounts look like, it is waiting for us with constant value in real dollars.

Thesaints
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Re: Ibonds for Emergency Fund

Post by Thesaints » Thu Mar 26, 2020 5:01 pm

Great asset for an emergency fund, after 11 months and 1 day. Before that, it's actually the very worst.

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KlingKlang
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Re: Ibonds for Emergency Fund

Post by KlingKlang » Thu Mar 26, 2020 5:11 pm

Thesaints wrote:
Thu Mar 26, 2020 5:01 pm
Great asset for an emergency fund, after 11 months and 1 day. Before that, it's actually the very worst.
This is true, but given that many people will want their emergency fund to be larger than the annual I Bond purchase limit it may take several years to buy enough of them anyway.

17outs
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Re: Ibonds for Emergency Fund

Post by 17outs » Fri Mar 27, 2020 11:07 am

I understand the hold in paper aspect, but it sounds like buying a TIPS etf would be much easier to track. Is liquidation at a local bank the biggest reason not to go that route?

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emlowe
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Re: Ibonds for Emergency Fund

Post by emlowe » Fri Mar 27, 2020 11:24 am

A fund or ETF is easier for sure, but TIPS are not tax-deferred - and TIPS funds can go down in value in short periods.

Your I-Bond, of course, can never lose money and generally your purchase power remains constant with inflation.

I-Bonds also have better deflation protection, but deflation hasn't been particularly common in US history.
Ferri Core 4: 40% Bonds | 6% Reit | 18% Total i18n | 36% Total US

ochotona
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Re: Ibonds for Emergency Fund

Post by ochotona » Fri Mar 27, 2020 11:44 am

Jack FFR1846 wrote:
Thu Mar 26, 2020 8:16 am
I have a large amount of paper savings bonds. Today's value of them all is around $376k with another $5k coming from my federal refund. With paper, I can bring them to my credit union and cash them for immediate availability. I've cashed as much as $50k in a single visit.

:sharebeer
Peter W., MBA, CRPC

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