Would you buy a new I-bond at 0% interest?

**Seeker** · 05-03-2009, 02:31 PM

Originally posted by StressLess View Post

I'm debating, myself, whether I'd be a fool to do it or a fool not to do it.

My plan for this year has been to buy a $500 series I savings bond every other month, for a total investment of $3500 by the end of the year. (We already have a $500 one from 2008.) This is for long-term emergency savings. Regardless of their interest rate, the I-bonds have some unique features that made me decide on them in the first place.

Tax savings and deferral
Paper investment my husband could deal with in case of emergency
Can let them sit in the safe deposit box for years on end, not having to renew them like CDs.
Being they are in safe deposit box, and not generating statements I see every month, I'm less apt to think of them as being available for spending
Won't lose value so we know what we can count on having in case of emergency
Interest rate will track inflation when it comes back. And I know it will.

June is my next scheduled purchase date, and I'm leaning towards buying another one anyway. If I'd been able to buy them through payroll savings, I would have, and I wouldn't have bothered the payroll person about suspending the deduction til the interest rate went up.

What are other people doing?

Can you define "long term emergency savings"?

I'm a bit curious about that concept.

I-Bonds have a three month interest penalty if cashed in before 5 years. Not sure what a long-term emergency would consist of to make taking that penalty worthwhile.

No problem with I-Bonds intended for no future use. Cashed in when due or after

**disneysteve** · 05-03-2009, 04:03 PM

Originally posted by Seeker View Post

I-Bonds have a three month interest penalty if cashed in before 5 years.

I just wanted to comment on this. You can very simply reduce the penalty to one month of interest. Buy the bond at the end of a month and sell it at the beginning of a month. You still get interest for a full month whether you buy or sell on the 1st or the 31st.

**Seeker** · 05-03-2009, 10:58 PM

DS, are we talking about government issued I Bonds?

Trust Funds For Kids » iBonds

My understanding is that these are locked for 1 year minimum and for the first 5 years you'd pay a penalty of 3 months interest.

Not recommended for use with Emergency Fund type of monies.

An update to this article:

Trust Funds For Kids » Fixed Income

**StressLess** · 05-04-2009, 04:04 AM

By long-term emergency savings, what I have in mind is 3 months worth of expenses beyond the basic 3 months worth of expenses emergency fund, for a total of 6 months. Eventually I'd love them to total $10,000. If we never need it them in an emergency, they can just sit there til our retirement. I want a good chunk of money in something that is stable, that I don't have to pay current taxes on, and that isn't in an IRA.

I like the fact that we can't cash them in for at least a year, because it forces me to accumulate the money and not spend it. And I don't see where paying a penalty for cashing them in before 5 years is any worse than paying a penalty to cash in a CD early. It's better than paying interest on borrowed money. And it's sure a lot better than paying the IRS a penalty for taking money out of an IRA early. It's for something really big and unusual that might come up, like a new roof or having to pay our own health insurance again for a year or so.

We've had quite a bit of stuff come up over past few years, and what I've found is, even a $1000 emergency fund is enough to cover most things. We have a money market account that we put money into regularly and we write checks as things come up. I'd like to build that up to $10,000, too. But I find that it's awfully easy to just write a check to solve a problem if the money is there, as opposed to being forced to find a cheaper way. So while I'm watching our savings bond total growing, the money market never seems to get anywhere.

My question really wasn't whether the I-bonds were good for an emergency fund, it was whether you'd put money into them right now, when they are paying zero percent. I guess what I mean is, I'm thinking it's still worthwhile because of their unique features, and to be in a good position when inflation kicks in again.

**disneysteve** · 05-04-2009, 04:29 AM

Originally posted by Seeker View Post

DS, are we talking about government issued I Bonds?

Trust Funds For Kids » iBonds

My understanding is that these are locked for 1 year minimum and for the first 5 years you'd pay a penalty of 3 months interest.

That's correct, but that 3-month penalty can be shortened to 1 month by timing your bond purchase properly. I-bonds pay a full month of interest regardless of when during the month you purchase the bond. For example, if you buy a bond today, May 4, you will earn a month's worth of interest for May. If you buy a bond on May 29, you will also earn the same month's worth of interest for May but you will have owned the bond for 25 fewer days.

When you sell, the same holds true. If you sell a bond today, May 4, you get interest for the entire month of May just the same as if you don't sell until May 29.

**simpletron** · 05-04-2009, 07:06 AM

I think the plan of having 3-6 months of your emergency fund in saving account/cd ladder and then an "extended" emergency fund in I-bonds for a really big emergency is a very good plan. I have already set this up for myself where I have 6 months in a savings account, 4 months before interest in I-bonds.

but you do have terrible timing. it isn't because the current I-bonds are earning 0% because every I-bond ever bought is earning 0% for the next 6 months. It is because the fixed rate is .1%. when you do cash the I-bonds, you owe taxes on both the inflation part interest and the fix part interest and this will give you a negative real return. for example let's say inflation was 2.4% for the year(below average) and are in the 25% tax bracket, then you earn 2.5% in interest and owe .5% in taxes, for a -.4% to your purchasing power. start compounding that out for many years and you will lose a sizable chunk of your purchasing power. you need a .6 or .7% fixed rate just to not lose purchasing power because of taxes.

I would advise buying a 6 month cd and trying again in november because the fixed rate can't go much lower. and you want to maximize the fixed rate because there is a good chance you'll be holding on to these for a long time.

Originally posted by disneysteve

That's correct, but that 3-month penalty can be shortened to 1 month by timing your bond purchase properly. I-bonds pay a full month of interest regardless of when during the month you purchase the bond. For example, if you buy a bond today, May 4, you will earn a month's worth of interest for May. If you buy a bond on May 29, you will also earn the same month's worth of interest for May but you will have owned the bond for 25 fewer days.

When you sell, the same holds true. If you sell a bond today, May 4, you get interest for the entire month of May just the same as if you don't sell until May 29.

while this is true, I wouldn't say it is shortening the penalty to a month. lets say you bought an I-bond in january 31 2000 and sold it in july 1 2004. you lost "july", june and may 2004 interest and "gain" january 2000 interest. but may 2004 and january 2000 interest rates aren't the same because the rate changes over time. If I-bonds had just a fixed rate, I would argee to calling it shorten the penalty to month. but as it is, this shortens the penalty to the 2 last months and gives the opportunity for double interest during the first month.

**kork13** · 05-04-2009, 01:08 PM

I was considering starting a small I-Bond allotment from my paycheck (very small... like, $50-$100/mo), but given the deflationary state right now (and seeing it confirmed by the Fed's current determination of -5.XX% inflation), I have reconsidered, and I won't be doing so... at least not right now. The biggest problem with buying I-Bonds right now is that the 0% fixed rate sticks for the ENTIRE LIFE of the bond--so up to a full 30 years if you keep it that long. Thus, I'm going to wait until the fixed rate comes back up somewhat. (It used to be as high as 3.5% or so)

If you want a saving vehicle that is hedged against inflation, look at TIPS for now. They're running about 2% + inflation right now.

I also saw this today, might be worth a read for you (OP): CNN.com: "Fighting inflation: I-bonds vs. TIPS"

**StressLess** · 05-06-2009, 04:03 AM

Simpletron, I hadn't tried to figure out what fixed rate is required to cover the taxes. I'm glad you thought it through.

Kork, good article.

Thanks!

Would you buy a new I-bond at 0% interest?