Is there a downside to owning Series "I" Bonds?At the current rate (6.49%) it really looks like a good deal to me.I'm new to investing ... finally out of debt and looking to build anest egg (3 month living expenses - then on to stocks!) ... so any advice will be appreciated.
The I-Bonds' rate is not fixed. They are based on the inflation rate. If the inflation rate changes, so will the interest rate. Some have criticized the government for ignoring certain essential factors in calculating inflation.Also, the interest rate is based on the inflation rate a while ago. If you redeem them during a period of high inflation, there won't be as much inflation protection.Still, I think they're a good deal when used in moderation.
>> Is there a downside to owning Series "I" Bonds?At the current rate (6.49%) it really looks like a good deal to me. <<The main downside (and upside, depending on your perspective) is that they are tied to the inflation rate, so if inflation falls, so will the return of your I-bond, in an environment when stocks and bonds are more likely to rise.The interest rate is due to change next month, I believe. It dropped from 7.4% or so to 6.49% in the last adjustment; I'm not sure where it's headed now. Currently the semi-annual inflation component looks like around 1.44%, which would be about 2.9% annually. Unless the index is adjusted heavily, a return in the 6.0-6.4% range seems likely for new bonds purchased starting May.I think they're a pretty good deal for a modest amount of long-term cash holdings, such as an emergency fund, but a The long-term return surely isn't likely to provide a comfortable early retirement, for example. But if you're looking for a long-term parking place for an emergency expenses fund (that three months you talk about), it's a good place to go with it provided that you don't tie up more than about 1/3 of your cash at any one time (to maintain liquidity).#29
looking to build a nest egg (3 month living expenses - then on to stocks!)I have part of my contingency fund in I-Bonds so this message will address that aspect of the situation.I wouldn't want to put all of my contingency fund into an I-Bond because there are often smaller cash emergencies where having the money nice and liquid is very convenient, e.g., minor car repairs, some medical expenses (deductables, co-pays, etc.), repair or replacement of major appliances. I find that these expenses occur often enough that I find it is useful to keep a certain amount of money liquid (money market account, money market fund, or, if one must, in a regular savings acount).I-Bonds have certain issues that may cause you to consider getting into them over time instead of all at once. There is a 6-month period of illiquidity (unless you live in an area that ends up being declared a disaster area) so there is a period where you cannot touch that money. Redeeming I-Bonds held for at least 6 months but under 5 years will incur a forfeiture of the most recent 3 months of interest (you don't lose money, but your returns will be a little lower than planned on if you redeem uner 5 years), so generally you would want to put money in I-Bonds that you don't expect to need soon, even though you can get to it under 5 years if need be, so after the first 6 months they do meet the "safety" and "liquidity" standard for an emergency fund. And since redemption of I-Bonds are an all-or-nothing affair, it is nice to have several "smaller" I-Bonds rather than one large I-Bond so if you need money you could redeem closer to the amount you need (e.g., if you need $1,200 but you have $1,000 I-Bonds, you would have to redeem $2,000 worth in two $1,000-sized I-Bonds, but if you had $500 I-Bonds, you could redeem $1,500 worth in three $500-sized I-Bonds, and keep the forth $500 invested).So, depending on your comfort level, I would be inclined to keep the equivalent of one month of living expenses in a money market fund, money market account (if you meet the minimums for either of these), or a savings account, and then keep the equivalent of two months of livng expenses in I-Bonds.What I have done is put the equivalent of 3 months of living expenses in my credit union's money market account, and another equivalent of 3 months of living expenses in several $500 I-Bonds. Historically (over the past 25 years) I have needed more than the equivalent of 3 months of livng expenses only twice, but I had needed the equivalent of 1 to 3 months of living expenses on several occasions, which may explain why I have decided to use the two-tier approach to my contingency fund: one tier very liquid, the other tier a litle less liquid for expected better long-term returns. The fact that the I-Bond is exempt from state taxes (9%) and the taxes on the interest can be deferred until redemption are nice pluses.
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