@Citylights18 Your compounding is still not quite correct:
> Month 10
> I-Bond balance $800+($800x0.0962)=$876.96
a) You added the entire 9.62% after only six months, it should add only add half that.
b) It compounds six months after purchase, which was in month 8, so it wouldn't compound until month 14.
I'm still not following how this makes sense assuming you could avoid the PLOC altogether and pay the $800/mo bills in cash plus an extra $200/mo towards I Bonds.
Here's what I have for your scenario. This is the cash leaving your pocket. I ignored the I Bond interest, because it's not relevant in my opinion.
| Month | Interest | Bills not PLOC | Payment to PLOC | I Bond Contribution | |
| 4 | $49.63 | $800.00 | $300.00 | $0.00 | |
| 5 | $48.40 | $800.00 | $300.00 | $0.00 | |
| 6 | $47.14 | $800.00 | $300.00 | $0.00 | |
| 7 | $45.87 | $800.00 | $300.00 | $0.00 | |
| 8 | $44.60 | $0.00 | $300.00 | $800.00 | |
| 9 | $47.33 | $800.00 | $300.00 | $0.00 | |
| 10 | $44.79 | $800.00 | $300.00 | $0.00 | |
| 11 | $44.79 | $0.00 | $300.00 | $800.00 | |
| TOTAL: | $372.55 | $4,800.00 | $2,400.00 | $1,600.00 | $9,172.55 |
Here's what I have for my scenario:
| Month | Interest | Bills not PLOC | Payment to PLOC | I Bond Contribution | |
| 4 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 5 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 6 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 7 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 8 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 9 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 10 | $0.00 | $800.00 | $0.00 | $200.00 | |
| 11 | $0.00 | $800.00 | $0.00 | $200.00 | |
| TOTAL: | $0.00 | $6,400.00 | $0.00 | $1,600.00 | $8,000.00 |
So overall, in my scenario I pay $1,172.55 less, but in your scenario you reduced your PLOC balance by $423.18, so that's a net difference of $749.37. In other words, you've paid an extra $749 to get the same amount of I Bonds, but worse because my I Bonds will have been earning interest earlier.
Edit: and I also pay less per month. $1,000/mo for me vs approx $1,150/mo for you.
@Citylights18 The other poster, Anonymalous, definitely knows what they're talking about, but the answer is more complex than indicated in there post.
I bonds have a variable rate published every May and November. However, each individual bond changes rates every six months from when you buy it. So if you buy in April 2022, you get six months of November 2021's rate, then six months of May 2022's rate, then six months of November 2022's rate, etc. This particular bond compounds in April and October of each year. If you bought in in January, it compounds in January and July.
Additionally, the 12 month lockup clock starts from when you buy the bond, so a bond bought today is available to be cashed on April 1 2023.
For the fact that you want as much available to be withdrawn it's better to buy early and often if you cannot afford the entire $10k at once.
> The fact that the current bond rate is 7.12% and going to be 9.62% is also immaterial becase it could be 12.92% when the next CPI-U is calculated. There is no reason to normally buy 10k of them at once.
This doesn't matter, the $10k would get the hypothetical 12.92% rate as well.
I don't agree that you should put an emergency fund in mutual funds, unless it was a fixed income fund. What a happens if you lose your job because the stock market crashes? Then your emergency fund is very diminished at the very time you need it.
Emergency funds don't need to even keep up with inflation, you can view it as insurance costs to have liquid cash floating around. However, since I bonds exist you can have your emergency fund indexed to inflation, you just have to be mindful of the 12 month period where each I bond purchase cannot be cashed.
Heres a few links I think you might find interesting:
https://www.bogleheads.org/wiki/I_savings_bonds
https://eyebonds.info/ibonds/index.html
https://earlyretirementnow.com/2021/05/26/the-emergency-fund-is-still-useless/
The last link is because it gives some interesting thoughts on how to look at an emergency fund.
On mobile, excuse any typos.
I found an I-Bond calculator on Treasury Direct and ran a few numbers.
-Interest accrual begins on the 4th month. If you were to buy an I-Bond today you receive an accrual August 1st.
-Had you been buying I-Bonds the proceeding 12 months you would have only earned 140.80 in interest. That is about 1% return on your money in one year. However if you spent $1000 on an I-Bond on 09/1998 it would be worth $3700 today which is almost 4 times what you paid.
-If someone bought 10,000 then for 5 consecutive years and needed to tap that money they could start with those they've held 12-18 months and keep the later ones until maturity to allow them to continue to develop in value over time.
@Citylights18 What exactly do you mean by "less valuable i bonds"?
For at least two months of the year, every I bond ever purchased will be earning the same variable rate. The only thing that never changes is the fixed component, currently 0%.
The ideal cashing strategy is to cash bonds older then 5 years, with the lowest fixed rate between all i bonds you've purchased.
You can also redeem less than the full amount. It doesn't matter if you buy one single $10k bond, you could cash out as little as $25 at a time.
I ran the numbers from May 99' on I-Bond to May 07' to see its really about holding them for as long as possible rather than flipping them after a year (from the calculator that is 1.7 percent return).
For example if you were out of college and able to save 10,000 and put into I-Bonds for 5 years but then lost your job for 3 months you could take the bonds which are 12-14 months in maturity and redeem for extra cash while continuing let those old I-Bonds age out. Its like losing your job when you own a house, you are still putting away equity with time. The bonds that you had at 12-14 will be worth more than what you paid for them (albeit not much) so its no worse than having that money in the bank.
How much would 10,000 in notes be at final maturity? 50,000 after these deflationary decades? If we go through inflationary times 10,000 could be worth 80,000+. Definitely something to consider getting into.
@Citylights18 I am not sure how you got your numbers, but if you bought $10k the very first month I bonds were introduced in 1998, it would be worth $37,004 today. And that's with a 3.4% fixed rate that you're not getting any time soon; the fixed rate is currently 0%. Source: https://eyebonds.info/ibonds/10000/ib_1998_09.html
To simplify my previous point; it is better to cash out a bond that's older than 5 years versus one that's between 1-5 years old, assuming they both have the same fixed rate. You're considering the 3 month penalty on the less than 5 year bonds, correct?
Also, you're assuming you must cash out the whole bond, this is not true. You can cash out any amount from an electronic bond.
I hope this clears some things up. I bonds can be a bit confusing. The temporary hype is real. I've been investing in them for a few years now since rates were still pretty normal and will keep investing in them when rates go back down.