The Motley Fool on emergency funds
Friday, November 17th, 2006
Categorized as: Savings Bonds and competitive investments
One of the mantras you'll see over and over again on this web site and in my book is that Series I Savings Bonds are a great choice for the low-risk portion of your investment portfolio.
Everyone should have enough money to live at least six months in an emergency fund. The best place for your emergency money is an investment that's liquid. Liquid means that you can cash in the investment at any time with no chance that you'll get back less than you put in.
Investments based on traditional bonds or the stock market don't work for this. If the market's down when you need the money, you have no choice but to take the loss.
The Motley Fool is a well-known investment web site that's mostly about those traditional stock and bond investments, but yesterday even the fools took investors aside to talk about I bonds as a good place for your emergency fund in the article Inflate Your Savings.
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I would point out a caveat with putting your emergency funds in I bonds - the twelve month restriction on redemption. Woe to the person who moved their entire fund into I bonds and then needed it six months later.
If taking this path, I would recommend laddering into I bonds by spacing out purchases perhaps quarterly. If one wanted the security of Treasury obligations, the "unladdered" funds could perhaps be parked in notes or marketable securities.
Ferdinand - Good point. I agree.
Tom Adams
Seems like I-bonds could also come in handy for those who retire early before they're eligible for penalty-free withdrawals from their 401K/IRA.
During that time, you could just redeem the I-bonds that you need to pay for your expenses. If you have like $40K in expenses, just redeem $40K value in I-bonds. If half of that is interest, then you would have a very low tax rate. In that case you could almost consider the I-Bonds as tax-free.