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I-Bonds for "Short Term" interest
Old 06-25-2011, 03:36 PM   #1
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I-Bonds for "Short Term" interest

Kiplinger magazine had a short article on using I Bonds as a short term (1-year) play to improve interest rates over most banks' CDs of equivalent term. Right now, according to the article, the rate on I bonds is 0.00%, but for the next 6 months, the inflation portion is 4.66% (IIRC). The idea is that, even if the following 6 month inflation interest drops to zero (not likely) one would make (4.66%/2)PA at a minimum (2.33%PA). You can't cash the I bonds for one year and you lose the last 3 months interest if you cash between 1 year and 5 years. Still, with a floor interest rate of 2.33%, this might be of value to some folks wishing to park money for a year. The insane limits to purchasing I bonds are $5K/individual (or $10K/couple) as paper bonds. A similar amount can be purchased electronically. So, a couple could conceivably purchase up to $20K in I bonds to use this short-term play. An interesting side note. Purchasing at the end of the month picks up the whole month's accrued interest. So, for the first 6 months, this would be equivalent to about 5.5/2%PA.

DW and I will probably pick up the paper version before June ends.

As always, YMMV.
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Old 06-25-2011, 04:12 PM   #2
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Purchased I bonds for the 1st time with this logic in mind.
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Old 06-25-2011, 04:18 PM   #3
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I have no problem with I bonds as a part of "cash" savings or even *part* of an emergency fund, but you need to make sure you have 6 months of fully liquid assets as an emergency fund before you do, because the bonds can't be cashed in for 6 months in most cases. Before 5 years there's an interest penalty for redemption, but that's not a showstopper in most cases, especially compared to 0.2% MMF yields and such.

Having said that, I haven't bought I-bonds since 2000 when there was a 3.4% fixed rate attached to them. Even with my misgivings about the CPI I sure wish I could have backed up the truck there. But even now, with a mostly nonexistent fixed yield, even getting the CPI as a return is likely much better than I see MMFs and other cash equivalents performing for another year or two, most likely.
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Old 06-25-2011, 04:23 PM   #4
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Will be maxing out our I-bonds again this year. Another advantage for those of us in higher tax brackets is the interest accrues tax deferred for 30 years and completely tax free if used for education expenses. Bogleheads has a good wiki article on I-bonds for any interested: I Savings Bonds - Bogleheads.

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Old 06-25-2011, 04:34 PM   #5
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Quote:
Originally Posted by ziggy29 View Post
I have no problem with I bonds as a part of "cash" savings or even *part* of an emergency fund, but you need to make sure you have 6 months of fully liquid assets as an emergency fund before you do, because the bonds can't be cashed in for 6 months in most cases. Before 5 years there's an interest penalty for redemption, but that's not a showstopper in most cases, especially compared to 0.2% MMF yields and such.
You have to start somewhere. With that in mind, I bought a token amount last year. If I could figure out how to get back into my TreasuryDirect account, I would probably buy some more, but the aggravation is not worth it. I will probably leave this up to my heirs to figure out.
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Old 06-25-2011, 06:47 PM   #6
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I trotted over to the bank across the street from office on May 31 and bought $5,000 in paper I bonds (five $1000.00 notes came in the mail two weeks later). All the articles I read in the last month kept touting them like they were the next greatest thing to sliced bread so I figured I should snatch some up rather than keep so much in a checking account paying next to nothing.
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Old 06-26-2011, 05:15 AM   #7
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I bought $10k of I-Bonds on-line for DW and I. Took the money from our bank savings account which is earning 0.9%. If a big emergency happens before 12 months are up I can cash in some of the older I-Bonds. If the rate drops back below bank savings rates in 12 months I don't mind the 3 month penalty since 3 months penalty on a tiny interest rate is negligible.
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Old 06-26-2011, 05:33 AM   #8
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Been looking at them for longer term investment in a ladder for taxable money.

I am not willing to commit at 0% investment return.

I am holding too much cash and need to put it to work. Right now I am going to wait till QE2 ends to see what kind of effect that has on markets.
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Old 06-29-2011, 06:20 PM   #9
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DW and I pulled the trigger today and purchased $5K each I-bonds at a bank.

VERY STRANGE sidelight. Recent account openings at banks - even banks where they personally knew me - required picture ID. They even have little signs all over the place telling customers not to be surprised by the requirement as it is a FEDERAL requirement to get ID's before opening a new account. Terrorism, blah, blah, blah. BUT, for I-bonds, no ID (other than SS#) was required. For all they knew, we wrote them a bad (heck, could even have been forged) check for a Federally offered bond. Go figure! YMMV.
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Old 06-29-2011, 06:52 PM   #10
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Purchase on the last business day of the month, which will give you interest payments for the entire month and effectively reduce the penalty to 2 months if you cash out within 5 years.

That works best at a bank where you can get a receipt for the date of purchase. When I purchased electronically I gave myself a day or two safety factor to make sure the purchase cleared by the end of the month.

EDIT: I'm still on the fence out 0% real rates. I purchased I Bonds several years ago when rates were slightly higher. Currently my short term reserves are in Ally 5-year CDs with a 2 month early withdrawal penalty.
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Old 06-29-2011, 08:35 PM   #11
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I jumped in and bought $5,000 of I bonds yesterday at my credit union. They did ask to see my picture ID and I appreciate that ID is checked. Even if the second 6 months of the first year is zero that isn't much lower than current rates on mm accounts and such.
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