I-bonds or money market for Emergency Fund?

[mangodance]

We have a (depleted at this point) Emergency Fund that is in a Money Market Acct. I'm wondering whether we'd be better off putting this into I-bonds given that the interest is much better and they can be cashed early with little penalty.

Thoughts anyone? Potential drawbacks?

 

[charlie]

You have to hold I-bonds at least one year before cashing.
Not cool for an emergency fund. Maybe you should build
up your MM first and buy I-bonds when you are comfortable
with your emergency stash.

Cheers,

Charlie

 

[Helen]

Hi Bigfoot,

I've been researching whether to use I bonds for my after tax early retirement money.

One thought in using I bonds for an emergency fund is that you can not withdraw the money for 1 year.  Between 1 - 5 years you can cash them in and take the 3 month penalty.  After holding them for 5 years they are penalty free.

So in your case, I bonds may not meet your needs.

-helen

 

[Art]

The best money market rate I know of is 3.25% at www.emigrant-direct.com

 

[wabmester]

You want a high-yield money market? How about 4.04%?

http://www.fordcredit.com/moneymarket/index.jhtml

Think of it as sort of a junk bond money market.

 

[mangodance]

I should have offered a bit more. I would still keep an emergency reserve in cash... but additional money could be diverted to Ibonds...sort of a two-pronged emergency Fund (EF). In the past, with a full EF, it pretty much just sat there, and we did everything we could with cash on hand not to hit the EF anyway.

 

[Art]

Sure, I think anything you can absolutely leave alone for one year should go into 4.8% tax-deferred (current rate) I Bonds. Buy the paper I Bonds at your bank for faster redemptions when the time comes.

 

[Mr._johngalt]

You want a high-yield money market?   How about 4.04%?

http://www.fordcredit.com/moneymarket/index.jhtml

Think of it as sort of a junk bond money market. 

I have 3.50%, locked for a year and FDIC insured. Hard to beat.
I've looked.

JG

 

[kat]

My EF is in I-bonds.

 

[Art]

I have 3.50%, locked for a year and FDIC insured.  Hard to beat.
I've looked.

JG

That's great- where did you get it?

 

[Mr._johngalt]

That's great- where did you get it?

Amcore. They offer it at several local branches in northern Illinois,
and I assume elsewhere as I see a lot of literature lying around.
You need to be a new customer and have 50K to get this rate,
although I think they pay 3.25% over 10K. There are some other
restrictions on withdrawals, etc, but if you decide to close the account
"early" (less than 6 months?) the penalty is $15.00. Not much of a risk.

JG

 

[ShokWaveRider]

Corus Bank is still offering 4.10 for 1 year. Do not know about the penalty for early withdrawall. Why would and ER want to do that anyway?

SWR

 

[Mr._johngalt]

Corus Bank is still offering 4.10 for 1 year. Do not know about the penalty for early withdrawall. Why would and ER want to do that anyway?

SWR

Assuming your reference to a "penalty" refers to my post, there are lots of reasons. In the case of the Amcore account I mentioned, it is not a CD.
You can take money out any time with some restrictions. Anyway, let's say in 3 months you can get 4% liquid elsewhere. If I have 100K in the account,
it would pay to close it, pay the penalty and move the money. When I am "flipping" CC
money, the penalty is just one cost I need to factor in to make sure I
am maxing my "spread".

JG

 

[mangodance]

Buy the paper I Bonds at your bank for faster redemptions when the time comes.

Is there any additional fee tacked on from the bank method that would not be there if buying directly?

 

[Art]

Is there any additional fee tacked on from the bank method that would not be there if buying directly?

Nope.

 

[MJ]

Corus Bank is still offering 4.10 for 1 year. Do not know about the penalty for early withdrawall. Why would and ER want to do that anyway?

Hey, watch the inaccurate information you put out SWR, it's 4.11%.
On a $1000m, .01% more will earn you an extra $103 (before taxes of course).

 

[WilliamG]

Are you retired BigFoot?  If so, I wonder if the standard emergency fund is necessary?  We look at the need for planned expenses in a long range cash flow and then try to structure our overall portfolio allocation to inlcude some access to "ready reserves" if necessary; either for unplanned needs or market down turn.

i.e., 25% of our portfolio is allocated to "Cash & Reserves".  We are spending out of our money markets which are part of this allocation and are replenished periodically as part of our rebalancing process.  The other investments here are  1) I Bonds in taxable and 2) 5 year CD ladder in IRA.  Both are tax deferred until you need them, easy to access and principle guaranteed.   

 

[ShokWaveRider]

Hey, watch the inaccurate information you put out SWR, it's 4.11%.
On a $1000m, .01% more will earn you an extra $103 (before taxes of course).

Oooppps! Sorry, I was quoting Plain old Interest rate (assuming you withdrew the interest) on $100k or more. I should remember you are all APY guys, that would be 4.16% APY. I stand (Sit Actually) corrected.

SWR

 

[Alan]

I use I-Bonds as an EF, but you do need to be able to withstand that 1st year without withdrawing. Using Treasury Direct on the web is very fast and easy to use. I also use IBonds via the web as part of my retirement portfolio (the cash segment). Once I had bonds over a year old I was able to begin using it also for an EF. I use Bank of Internet for everyday cash at 3%/yr in the checking account, and had been using it for my EF until I had a year's worth of IBonds.

Alan

 

[Alan]

If you buy on the web through Treasury Direct, not only are there no fees, but you redeem partial bonds. eg buy a $1,000 IBond then later withdraw $50, $100 etc 8)

 

[Art]

I didn't know that. About how long does it take to redeem on-line I Bonds?

 

[Alan]

I just redeemed some bonds for the first time. I entered the transaction on Friday and it was in my bank on Tuesday which is 1 or 2 working days (Monday was the 4th July).

Alan

 

[Art]

Nice.

 

[LovesLife]

I just purchased the book All About Bonds and Bond Mutual Funds, by Esme Faerber. The author states that I-Bonds will only be redeemed 6 months after they are sold. The copyright on this book is 2000. This feature really turned me off. But now I am reading that it takes just a few days to receive your money? I hope that is true otherwise 6 months is a long time to park your cash.

LL

 

[ats5g]

I just purchased the book All About Bonds and Bond Mutual Funds, by Esme Faerber. The author states that I-Bonds will only be redeemed 6 months after they are sold. The copyright on this book is 2000. This feature really turned me off. But now I am reading that it takes just a few days to receive your money? I hope that is true otherwise 6 months is a long time to park your cash.

LL

LL,

The old 6 month holding period is that one couldn't redeem the I bonds from the FED until after 6 months after you've purchased them. This holding period has been lengthened to 1 year. After you've held the I bonds for 1 year, it should only take a few days to redeem the I bonds [as stated above].

- Alec