What about I-bonds?
June 12, 2012 7:04 AM   Subscribe

I'm looking to get a better return on part of my emergency savings fund, and I am interested in I-bonds. Have you purchased any, and if so, what was your experience? I'm also interested in hearing about other suitable investments.

Right now I have everything sitting in an ING savings account, earning 0.8%. My goal is to try an push up the return on part of my funds, knowing that I'll likely have to sacrifice short-term liquidity and/or take on some risk of principal loss. From what I've read, I-bonds seem well suited for this. Although they have a one-year lockup, after that period they are freely redeemable and right now they offer a 2.2% return. What's your take on them? (If it makes a difference, I have about 20k to play with.)

I'd also be interested in hearing about how others have invested some part of their savings outside the securities markets. I know a common recommendation are CDs, but ones of reasonable length don't seem to offer much of a return right now. I will say LendingClub.com looks interesting, but I don't know anyone who has used it.
posted by hobbes103 to Work & Money (7 answers total) 9 users marked this as a favorite
20k seems high for an emergency savings fund. People generally recommend 3 to six months living expenses.

That being said, you might want to ladder your CDs or bonds. My, how returns have gone down.
posted by the man of twists and turns at 7:57 AM on June 12, 2012

Do note that the fixed rate on I-bonds is 0% right now. On the other hand, it does keep up with inflation and you won't get guaranteed 2.2% on any risk-free asset right now. The interest grows tax-deferred and it is free from state and local taxes

I won't consider it a great investment for the retirement portfolio, but it is certainly a much better choice than your money market.

I tend to like short to intermediate term municipal bond funds for my short term bonds in taxable accounts. They are higher up on the risk ladder, but not dramatically so. You don't pay any federal income tax on them and while they were quite volatile last year, by and large, they have been pretty good at preserving capital so far.

Please do your own due diligence.
posted by justlooking at 8:01 AM on June 12, 2012

I'm not disagreeing with anything that's been said... but, in a 0% interest rate environment, paying down debt is probably the best thing you can do, so start with that.
posted by teabag at 8:10 AM on June 12, 2012

You might also consider a mutual fund or ETF based on inflation protected securities. The NAV of the fund does fluctuate because they track the current value of all of their bonds (IE, they are marked-to-market) but you gain liquidity. and the values look reasonably stable.
posted by VTX at 8:15 AM on June 12, 2012

I-bonds are a pretty good product, and I think everyone ought to at least have some of them in their portfolio; they aren't perfect, but certainly are a pretty good hedge against inflation. (At least "inflation" as the government decides to officially define it, which may differ from actual inflation as perceived by you.)

I've bought them in a few different ways over the years that they have been offered. The easiest way -- which you unfortunately can't do anymore -- was just to go down to a full service bank and buy some. They'd give you an order form, you fill it out and pay for them, and then in a week or so you come and pick up your bonds. Some banks required you to be an accountholder to do this, others didn't. But alas, the Treasury is getting out of the paper bond business, and you just missed your last opportunity to buy them this way. Sucks.

You can buy electronic bonds through Treasury Direct. I attempted to do this once and failed utterly. They have some ridiculously strict security measures, such that I got trapped in a nasty Catch-22 that required me to get a "bank officer" from the bank that I wanted to link up to verify my identity. Since I was trying to link an internet bank that only has offices in Texas, there was no way for this to happen (and the bank had never heard of this and was understandably reticent to go signing a bunch of scary Treasury paperwork that's obviously designed to be part of an in-person ID check). Honestly, I just got really pissed off at the whole thing and decided to stick with paper bonds rather than screw around with their idiotic policies -- but that was before they discontinued paper bonds. So now there's no choice.

Except you can get your hands on actual paper bonds via your tax refund. Starting this year, when you filed your tax return you could choose to have some of your refund given to you in I-bonds rather than cash. I did this, and they showed up in the mail a few weeks later. So this is a fairly good way to buy them, assuming that you have a positive tax refund each year and don't want to buy more bonds than your refund. There is unfortunately no way to buy more bonds than your refund amount, even if you're below the annual maximum for the bonds. (Though I guess you could intentionally overcontribute to your taxes by modifying your withholding, with the idea of using the refund for bond purchases.)

As a functional alternative to I-bonds, you can also buy TIPS. They have the advantage of being marketable, and thus a lot more liquid than Series Is. And you can buy them through a regular broker, so no screwing around with the Treasury's asinine website. However, there are some differences that you should be familiar with; there are some ways in which TIPS aren't quite as nice as Series I bonds... the tax treatment of Series Is are significantly better for most people (to the point where most people holding TIPS do so inside a tax-deferred account).
posted by Kadin2048 at 8:17 AM on June 12, 2012 [3 favorites]

I buy i-bonds weekly through a direct deposit from my paycheck to Treasury Direct. Their security has been the tightest of any banking site I've used, but I don't think you need the pass code card they use to mail out anymore. The initial setup was complicated, but with the direct deposit setup, I don't have to do anything else now to keep buying i-bonds. I also don't believe buying more through their site is too difficult, although it's more difficult than to buy stocks via ING or Vanguard.

You are limited to I believe $30,000 purchase a year, which probably isn't a problem. The returns I've been getting on my I-bonds is better than any standard bank investments from savings accounts, to Money Market, to Certificates of Deposit.

After seeing how well they were doing, I also put some money into Vanguard's bond index fund, which I think a) outperforms the i-bonds (looks like 6% annual return for the last 2 years), and b) doesn't have a minimum hold time. It is slightly riskier however, and the return is not guaranteed.
posted by garlic at 10:05 AM on June 12, 2012

They have some ridiculously strict security measures, such that I got trapped in a nasty Catch-22 that required me to get a "bank officer" from the bank that I wanted to link up to verify my identity.

I think this is no longer the case. I remember having to do that several years ago, but then I let my TD account lapse and had to set up a brand new one from scratch last November. I did not have to do any kind of linked account verification this time around.

You are limited to I believe $30,000 purchase a year

The current limit is $10,000 per year (electronic) and $5,000 per year (paper, which you can only get via tax refund). This is per person.

I own some I Bonds purchased over the last few months. I'm happy with them. I don't have any debt to pay down, and I'm saving up money for short-term use (say, the next 3-5 years) so I don't want to risk it in stocks. I have some I Bonds still paying the previous 3.06% rate, and others paying the current 2.2% rate. Both of those are far better than I could get with any internet savings account, and even most long-term CDs. I realize the rate could change, and if it does, I'll re-evaluate. But for now, I'm happy.
posted by Nothlit at 5:26 PM on June 12, 2012

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