Emergency funds are meant to carry you through in times when your cash flow drops, like if you lose a job. This money is meant to pay the bills until your cash flow comes back. There are a lot of recommendations about how many months worth of expenses you should have saved up, from 3 months all the way to 12.
Emergency funds are meant to be kept in liquid cash. The money should be easily accessible, because you never know when you may have a money emergency or job loss and need to access that money to pay your bills. We, the Moneyaires, have about 8 months worth of expenses saved up which sits mostly in checking and savings accounts. Its very comforting to know we have such a cushion. Its also really annoying to see all that money sitting in a savings account gaining practically nothing, especially during a time of higher inflation like we’re experiencing now.
I have been thinking about what to do with about 3 months of this money. Initially, I was going to invest it in the market. I have my reservations; the market is really hot right now. I didn’t want to buy into a hot market only for it to cool down and then needing to access that money at a loss.
I wanted something safe but with a better rate than a savings or checking account.
After a little more digging I came across Series I Bonds. Series I Bonds are issued by the United States Treasury Department and can be purchased at TreasuryDirect. They are practically risk free. These bonds have a fixed rate and a rate to “hedge” against inflation. This means the bond rate moves with inflation so your money doesn’t lose value to inflation when its in a Series I Bond.
When you have money sitting in a bank account not earning interest, it’s losing money to inflation. What I mean by this is that if you had $100 ten years ago, you could buy a lot more “stuff” than you can today. In those ten years, the price of goods and services have increased which means that money that hasn’t grown with those increases has less buying power today than 10 years ago. This is a big risk to savers who are not investors.
The Moneyaires are savers and we also plow those savings into investments so our money grows. This does come with a lot of risk. A lot of people are very risk adverse and feel the pain of losing $100 much more than the joy of earning $100. For those folks who are risk adverse, let me introduce you to the Series I Bond. It’s a virtually risk free US government savings bond that has a composite rate – there’s a fixed rate component and a variable component that moves with inflation. This is a great instrument for your money you would otherwise park in a savings or checking account to keep safe.
I asked a friend who invests in these about them and he said his family uses them as a safe hedge against inflation. From November 2021 through April of 2022, I Bonds will be paying 7.12% in interest. The rate starting May1st through October 2023 could be as high as 9.62%. This high interest rate certainly caught my attention and I started learning as much as I could about these bonds. In the savings bond world, this rate is seismic.
After some digging, this is what I learned:
- Series I Bonds are savings bonds that earns interest based on a fixed rate plus an inflation rate
- This means these bonds keep up with inflation – your money won’t lose value due to inflation when they are in a Series I Bond.
- The fixed rate stays the same for the life of the bond. The inflation rate resets every 6 months.
- For Series I bonds issued between November 2021 and April 2022 the rate is 7.12%. The interest rate between May 2022 and October 2022 could be 9.62%.
- You can buy a maximum of $10,000 per social security number per calendar year. You can also purchase through a corporation and your tax refund. I didn’t investigate those parts as the Moneyaires have neither.
- You have to keep the Series I Bond for at least a year.
- You receive your interest payments when you cash the bond, its also when you receive your principal back.
- If you cash out within 5 years, you’ll lose the last three months of interest payments as a penalty.
- After 5 years you can cash out without penalty.
- You can buy the bonds after creating an account with Treasury Direct.
- Treasury Direct is an absolutely horrendous website. At first I thought it was a phishing scam website. Its legit though, just made in the 1990s and never updated and without any design sense.
- Opening an account is NOT straightforward, especially if you have to get Form 5444 certified and then snail mailed to the US government for authorization. This happened when we tried opening an account for Mr. Moneyaire. Grrrr.
- You can keep the bond for 30 years.
- Interest pays out monthly. The bond compounds semiannually.
- You earn a month’s worth of interest regardless of when in the month you buy the bond. If you buy the bond on November 30th, you still get the entire month’s interest.
- These bonds are an extremely safe investment.
- You can buy these bonds online securely at Treasury Direct
I like these bonds as a place to park some emergency fund money. Its worth it to go through the hassle of opening an account to park some emergency fund money, especially if the interest rate is 7.12%. One of the biggest risks your money has in a savings or checking account is that it’s probably losing value due to inflation. Investing into I bonds mitigates that risk.
If you have extra cash in a checking or savings account you can live without for 12 months (even in an emergency) look into buying Series I Bonds. After 12 month period you can cash the bond with just a small penalty and the money will keep up with inflation. Locking up money for 12 months is the most difficult part of this strategy.
You don’t have to buy $10k of bonds up front. You can slowly buy into these bonds. After 12 months you’ll have full access to the money you put in. You can also redeem just part of the bond – you do not have to redeem to entire bond once the 12 month period is up. Given that, its a very tempting place to park money you’re saving up for a rainy day, just so long as it doesn’t start pouring within the 12 month holding period.
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