Emergency fund in I Bonds?

[bostonimproper]

Currently my emergency fund sitting in my HYSA. Should we be maxing out on I Bonds instead?

Current (variable) rate for I Bonds is 7.12%. HYSA is 0.5%.

Cannot redeem I Bonds for a year, but they are also capped at $10K per person per year, so most of the cash would still be sitting in HYSA for 2022. Could rotate into more next year and year after for ladder, assuming rate difference continues to make it worth it.

Is there some downside risk that I’m missing?

[shaz]

I'm interested in the replies to this. DH and I moved $ from savings account to I Bonds because the yield is better. We have built up our "cash" cushion in anticipation of quitting our jobs in 2023. If there is a big downside that I am missing, I would like to know soon.

[Lemur]

viewtopic.php?t=12165

[Chris]

I'm a fan of I bonds as cash for few reasons:

• Interest floats with inflation, so no need to go yield hunting between banks
• Yield can't go negative (unlike TIPS)
• Interest is tax-deferred
• No state or local income tax on redemption

So for "long" cash, it's better than HYSA due to the yield and ability to decide when you pay tax on the interest. The downside is the opportunity cost vs. an asset that appreciates, like using your Roth as an emergency fund.

And a few tips when dealing with I Bonds:

• Buy at the end of the month. Ownership is tracked per-month, not per day, so you get the same interest whether you buy on Jan 1 or Jan 31.
• The limit is $10k per person per year, but you can also get an additional $5k back as an income tax refund (Form 8888). You can force a refund by making estimated tax payments, though it's too late to do this for 2021 taxes.
• There is also a fixed component of the interest, which stays for the life of the bond. Right now it's 0%, but if inflation gets crazy, the Treasury might increase it. Something to be aware of.

[George the original one]

It's what I used until reaching retirement.

[unemployable]

The nominal return looks nice for now, but the real return will always be zero. Or negative if you cash them early. Which means you will always be spending them down in real terms.

[white belt]

I’m confused a bit by the purpose of an emergency fund for those who are employed with a high savings rate and a few years in living expenses saved already. What emergencies are you trying to protect against? I’m assuming you have heath insurance which should mitigate the financial risk of most medical emergencies.

In my mind, if you are working with a 50%+ savings rate, then an easy emergency fund plan is to just put said emergency on a credit card, which buys you some time to turn off your investment allocations for that month or liquidate some existing investment holdings. If the emergency is related to job loss, then credit card buys you time to get unemployment or other benefits. But realistically, you already have so much slack built into the system with a high savings rate and years of expenses saved.

[Scott 2]

My portfolio always had some amount of cash or fixed income position, which I considered my emergency fund. It was rare I couldn't pay unexpected expenses from this month's paycheck. One time I bought a new car in cash. That's about it. Early on, assuming someone can use credit cards responsibly, they strike me as a fine option.

Is it reasonable to put some amount of your fixed income position in I-bonds? Sure. Is it worth the hassle? Not to me.

[jacob]

I’m confused a bit by the purpose of an emergency fund for those who are employed with a high savings rate and a few years in living expenses saved already. What emergencies are you trying to protect against? I’m assuming you have heath insurance which should mitigate the financial risk of most medical emergencies.

Job loss? Midwinter furnace blowout? Dead car?

In my opinion, it's not a real emergency fund unless it's liquid and accessible(*). Hence, I'm not a believer in investing your emergency fund unless it's combined with a high limit credit card. Otherwise the monies should be sitting in a checking account (somewhere where instant clearing is possible even during weekends or off-market hours).

(*) Some of which may even include actual cash-cash. Remember when COVID shut things down. Imagine the banking system being down for a few days over some SNAFU. This is not to suggest keeping 4 figures of dollars bills around. OTOH, optimistically presuming that apple pay et al will always carry the day might be a tad optimistic.

In my mind, if you are working with a 50%+ savings rate, then an easy emergency fund plan is to just put said emergency on a credit card, which buys you some time to turn off your investment allocations for that month or liquidate some existing investment holdings. If the emergency is related to job loss, then credit card buys you time to get unemployment or other benefits. But realistically, you already have so much slack built into the system with a high savings rate and years of expenses saved.

Agreed!

https://earlyretirementextreme.com/i-do ... -card.html (written 14 years ago ... oi!)

[white belt]

Job loss? Midwinter furnace blowout? Dead car?

Yes, those are the typical reasons given for the average consumer living paycheck to paycheck to maintain an emergency fund. My point was more that the calculus changes when you are no longer paycheck to paycheck. I do have ~$10k in my savings/checking account at any given time for “oh shit” emergencies, but OP is talking about carrying >$40k in an emergency fund.

[bostonimproper]

Thanks for the feedback everyone! Good to know that for what we typically use HYSA for that I Bond continues to seem like a strictly better option.

Re why such a big emergency fund: major home repairs out here can be $$$. Plus job loss. I assume job loss is likely to be correlated with market downturn, so it gives me piece of mind to know I have a dedicated X months of runway. Intellectually I understand it’s probably the non-optimal way to be stashing funds, and we do have access to a lot of credit, but my anxiety wins out on this one.

[Married2aSwabian]

At 7.12%, I think they’re hard to beat at the moment. We bought $20k worth again this month.

After five years, you keep all interest. After one year, you forfeit only 3 months interest when cashing out. Before one year, you lose all interest… not much different from any “high” yield savings account now.

If you adjust for risk, which in this case is basically zero, there can’t be a better place to park cash right now. Took me about 10 minutes on Treasury site to set up.

[ether]

I bought the max i bonds via a margin loan at 1.5% via ibkr.
It's just weird I can get money @ 1.5% and get a risk free rate of return in the 7% range.

[unemployable]

After five years, you keep all interest. After one year, you forfeit only 3 months interest when cashing out. Before one year, you lose all interest… not much different from any “high” yield savings account now.

The strategy here would be to wait until the inflation portion resets to negative, then wait three months after your bonds reset to that amount, then cash out.

(I-bonds can never lose nominal principal, but they earn zero interest if the inflation adjustment is greater than the fixed component, which in this case is zero.)

[Married2aSwabian]

It may be a while until the inflation portion goes negative, but who knows - if deflation is coming next, then it’s possible. As you mentioned, unemployable, you cannot lose principal.

Here’s how interest is calculated:

https://www.treasurydirect.gov/indiv/re ... dterms.htm

[Kriegsspiel]

I use I-bonds as part of the short end of a bond barbell with long Treasuries.

I guess a downside risk to putting your entire allowance in now would be if they add a fixed component to I-bonds later this year. Maybe not that big of a deal for you (if they do add it) if you think you're going to be cashing them out in the short term.