PLOC Banking Strategy w/ I-Bonds

[Citylights18]

Is there a way to maximize cash flow with a PLOC? Here is a potential strategy I've been thinking about.

1) Have an interest only PLOC available (my interest only payment is $50 per $10,000).

2) Starting balance of 8,000 on the PLOC.

3) Place $800 dollars of bills on the PLOC.

4) Make a normal monthly payment of $200 to the PLOC.

5) Buy the I Series bond in both the electronic ($10,000) and paper ($5,000) with the extra cash flow.

Month 1

PLOC begining balance $8,000

Interest charged $40

Bills on PLOC $800

Payment to PLOC $200

PLOC ending balance $8,640

I-Bond balance $600x0.0712/12+($600)=$603.56

Month 2

PLOC begining balance $8,640

Interest charged $43.2

Bills on PLOC $800

Payment to PLOC $200

PLOC ending balance $9,283.2

I-Bond balance $1203.56x0.0712/12+($1203.56)=$1210.70

Month 3

PLOC begining balance $9,283.2

Interest charged $46.4

Bills on PLOC $800

Payment to PLOC $200

PLOC ending balance $9,929.6

I-Bond balance $1210.70x0.0712/12+($1810.70)=$1821.44

The problem after Month 3 is your PLOC is right up to the 10k limit so you will have to pay it down for a couple of months until you can stack it again.

Month 4

PLOC begining balance $9,926.6

Interest charged $49.63

Bills on PLOC $0

Payment to PLOC $200

PLOC ending balance $9,779.23

I-Bond balance $1821.44x0.0712/12+($1821.44)=$1832.19

Month 5

PLOC begining balance $9,779.23

Interest charged $48.90

Bills on PLOC $0

Payment to PLOC $200

PLOC ending balance $9,628.13

I-Bond balance $1832.19x0.0712/12+($1832.19)=$1843.06

Month 6

PLOC begining balance $9,628.13

Interest charged $48.14

Bills on PLOC $0

Payment to PLOC $200

PLOC ending balance $9,476.27

I-Bond balance $1843.06x0.0712/12+($1843.06)=$1853.93

Month 7

PLOC begining balance $9,476.27

Interest charged $47.38

Bills on PLOC $0

Payment to PLOC $200

PLOC ending balance $9,323.65

I-Bond balance $1853.93x0.0712/12+($1853.93)=$1864.87

4 months go by where you have to just pay down the line but by the 5th month you can fit your bills on the PLOC once again.

Month 8

PLOC begining balance $9,323.65

Interest charged $46.62

Bills on PLOC $800

Payment to PLOC $200

PLOC ending balance $9,970.27

I-Bond balance $2464.87x0.0712/12+($2464.87)=$2479.42

By this banking method what you are able to do here in 8 months is squeeze an extra $2,479.42 for I-Bonds out of thin air.

Regular monthly payments $200x4=$800

Full monthly bills $800x4=$3200

PLOC Interest $370.27

Total Expense for 8 months $4,370.27

This is netting you an ROI of 56.73% over the 8 months. But of course this includes the early run up months on the PLOC where you are skipping bills. In this example the $200 was 25% of the monthly bill amount but if you go to say 35% you would pay the PLOC down all that more quickly for the skip ahead payments.

Then I think with buying the I-Bonds instead of purchasing them all at once set aside 250 a month ($1250 if you are taking the max paper/electronic allowance). This way it also staggers the maturity of the notes and gives you discretionary power on whether or not to buy one that particular month.

[tortoise_credit]

It's still a bit early here: but here's some thoughts:

1) it looks like you were compounding the I bonds monthly. They only compound semi annually.

2) I bonds you buy this month will receive 7.12% APY for 6 months, then 9.62% for the next 6 months.

3) I bonds you buy from May-October will receive 9.62% from the start.

4) Be careful if you're comparing your PLOC with a variable rate tied to the prime rate versus the I bond rates.

Overall I don't quite follow the logic yet, but I'll reread it later today. If you were sure that you could borrow for less than I bonds pay, then why not just buy the full amount from day 1, pay the interest only on the loan, and then settle up in 12-15 months?

[Citylights18]

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@tortoise_credit wrote:

It's still a bit early here: but here's some thoughts:

1) it looks like you were compounding the I bonds monthly. They only compound semi annually.

2) I bonds you buy this month will receive 7.12% APY for 6 months, then 9.62% for the next 6 months.

3) I bonds you buy from May-October will receive 9.62% from the start.

4) Be careful if you're comparing your PLOC with a variable rate tied to the prime rate versus the I bond rates.

Overall I don't quite follow the logic yet, but I'll reread it later today. If you were sure that you could borrow for less than I bonds pay, then why not just buy the full amount from day 1, pay the interest only on the loan, and then settle up in 12-15 months?

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Thanks for the clarifications. I know there is a lot of excitement over I-Bonds but this is new ground for many of us on the board.

Since the maturity date of any I-Bond is 5 years out how does it make sense for the average person to lock up 15k for 5 years in one shot? But if they decided to alternatively buy $1250 each month, rainy day funds that would just be sitting in a savings account I think it would be a better strategic approach. Then if you really felt you did need the money or if inflation went back to 2.0% (which I doubt) you could just stop buying them.

I get that many peoople like the "all-in" approach to investing because they think a larger sum will earn them larger profits but one of the keys to successful investing is reducing risk. One could put all of their savings into an I-Bonds and lose their job. However I guess if you are retired that isn't a threat and if you have enough excess cash flow you could buy them without too much risk.

I-Bonds are not a bad strategy for 2022. The market is shot and the SEC is shutting down stablecoin products that were yielding investors 8-10%. Celsius is limiting its earn product now to accredited investors. They don't want competition with their treasury products. Even if you could find a platform for your stablecoins they'll probably be outlawed within a few months anyway. If I-Bonds are paying 9.62% that is in-line with stablecoin yields, if not better.

[tortoise_credit]

@Citylights18 I bonds have a final maturity date of 30 years, are redeemable after 5 years with no penalty, but can be redeemed after only 12 months (actually just 11 months and a few days), but there's a 3 month interest penalty if redeemed before 5 years.

So buying monthly does reduce the amount locked up at any point in time, but takes longer for a full years worth to be redeemable. This is important for some depending of cash flow for sure. But in your context I read it as taking a loan to buy I bonds which seems like simple rate arbitrage to me. It wouldn't really matter that amount is locked up because presumably you wouldn't have needed to take the loan otherwise.

[Citylights18]

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@tortoise_credit wrote:

@Citylights18 I bonds have a final maturity date of 30 years, are redeemable after 5 years with no penalty, but can be redeemed after only 12 months (actually just 11 months and a few days), but there's a 3 month interest penalty if redeemed before 5 years.

So buying monthly does reduce the amount locked up at any point in time, but takes longer for a full years worth to be redeemable. This is important for some depending of cash flow for sure. But in your context I read it as taking a loan to buy I bonds which seems like simple rate arbitrage to me. It wouldn't really matter that amount is locked up because presumably you wouldn't have needed to take the loan otherwise.

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Its using a PLOC as a cash flow management tool as its primary purpose over rate arbitrage.

The early run up period where you can stack money onto the PLOC isn't the best example for the longer haul. The better example is once you've hit the credit limit on the PLOC and making extra payments to it with the ability every 4th or 5th month to skip a payment. Present value of that cash flow is another positive factor.

It can be tried with multiple PLOCs.

PLOC 1: Mortgage 1, Mortgage 2 (pay 1/3 combined balance)

PLOC 2: Loan 1, Loan 2 (pay 2x minimum payment)

Use PLOC banking to artficially create a large cash flow which can go into the I-Bonds where there is no risk in losing your principal. Then if you do need to sell I-Bonds to raise cash just scalp the lower peforming ones first at let the better ones continue to mature. This helps again if the purchases are monthly with different 5 year maturiries than all at once.

[tortoise_credit]

@Citylights18 To be honest, I still don't really understand this.

You say you squeeze $2,400 in i bonds out of thin air, but the PLOC has gone up ~$2,000 in balance, and you had 4 months where you paid an extra $200 on top of your $800/mo bills. To me that seems like you spent $2,800 to get $2,400 in ibonds. This would make sense to me because you're paying approximately $400 of interest on the loan.

I can tell you my strategy with I bonds, which is to put 1/2 or 1/3 of your emergency funds into ibonds which represents the amount you can afford be be locked up for one year (not five years). Then the next year put another 1/2 or 1/3 in. After 2-3 years, your emergency fund is completely liquid in ibonds.

[Anonymalous]

A few considerations: You mentioned $10K in electronic I Bonds + $5K in paper. Except the paper is only available when paid for with a tax refund. Specifically, you have to include Form 8888 when filing your taxes. So it's not an option for most people, right now. And even when it is an option, it requires giving the federal government a $5,000 loan.

Also, April and October are generally considered the best months to buy I Bonds. The new CPI-U is announced, but the new I Bond rates aren't set until the 1st of May and November. That lets you lock in a high rate for almost 12 months. For instance, if you buy now, you get 6 months at 7.12%, and another 6 months at 9.65%. Even if you cash them in after a year and take the 3 months penalty, that's still an annualized return of roughly 6%.

[Citylights18]

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@Anonymalous wrote:

A few considerations: You mentioned $10K in electronic I Bonds + $5K in paper. Except the paper is only available when paid for with a tax refund. Specifically, you have to include Form 8888 when filing your taxes. So it's not an option for most people, right now. And even when it is an option, it requires giving the federal government a $5,000 loan.

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Another point on the I-Bonds I missed originally when looking into them.

With the 10,000 dollar limit per year then you are looking at being able to buy $833.33 per month, or rounding down to $800 a month for budgeting (a $500, $250, $50 dollar bond). It won't make you rich but if you sock it away for 5 years it could be enough for a car downpayment or a house down payment.

[Anonymalous]

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@Citylights18 wrote:

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@Anonymalous wrote:

A few considerations: You mentioned $10K in electronic I Bonds + $5K in paper. Except the paper is only available when paid for with a tax refund. Specifically, you have to include Form 8888 when filing your taxes. So it's not an option for most people, right now. And even when it is an option, it requires giving the federal government a $5,000 loan.

---

Another point on the I-Bonds I missed originally when looking into them.

With the 10,000 dollar limit per year then you are looking at being able to buy $833.33 per month, or rounding down to $800 a month for budgeting (a $500, $250, $50 dollar bond). It won't make you rich but if you sock it away for 5 years it could be enough for a car downpayment or a house down payment.

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It depends what happens to inflation. If it drops back to the old Fed target of 2% or so, then there are better alternatives. Especially if interest rates rise back to historical norms, though that seems unlikely, because it would make paying interest on the national debt difficult. That's why buying now, and not a week from now, is so attractive. It locks in a 7%+ rate for a full year, even if inflation drops by November. Unless we're heading into a new period of stagflation, the inflation is likely to burn out at some point, and returns will bottom out again. When that happens, I Bonds can still be useful as part of an overall asset allocation plan. They won't lose any nominal value, so they serve as a hedge, similar to TIPS. But if you're chasing returns, it might make sense to hold them an additional 3 months (to not lose any of the high interest rate), and then redeem them and put the funds in something with a higher APR.

[Citylights18]

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@Anonymalous wrote:

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@Citylights18 wrote:

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@Anonymalous wrote:

A few considerations: You mentioned $10K in electronic I Bonds + $5K in paper. Except the paper is only available when paid for with a tax refund. Specifically, you have to include Form 8888 when filing your taxes. So it's not an option for most people, right now. And even when it is an option, it requires giving the federal government a $5,000 loan.

---

Another point on the I-Bonds I missed originally when looking into them.

With the 10,000 dollar limit per year then you are looking at being able to buy $833.33 per month, or rounding down to $800 a month for budgeting (a $500, $250, $50 dollar bond). It won't make you rich but if you sock it away for 5 years it could be enough for a car downpayment or a house down payment.

---

It depends what happens to inflation. If it drops back to the old Fed target of 2% or so, then there are better alternatives. Especially if interest rates rise back to historical norms, though that seems unlikely, because it would make paying interest on the national debt difficult. That's why buying now, and not a week from now, is so attractive. It locks in a 7%+ rate for a full year, even if inflation drops by November. Unless we're heading into a new period of stagflation, the inflation is likely to burn out at some point, and returns will bottom out again. When that happens, I Bonds can still be useful as part of an overall asset allocation plan. They won't lose any nominal value, so they serve as a hedge, similar to TIPS. But if you're chasing returns, it might make sense to hold them an additional 3 months (to not lose any of the high interest rate), and then redeem them and put the funds in something with a higher APR.

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I would not even be looking at I-Bonds if it were not for the SEC clamping down on all the stablecoin products.

Even if inflation goes back to 2 or 3 percent it still is better than what banks are offering in the way of savings and particularly if that inflation number does drop back down.

Like putting away money into a Roth IRA or backdoor Roth IRA I can see where I-Bonds could be a regular part of your financial strategy.