PLOC Banking Strategy w/ I-Bonds

[Anonymalous]

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@Citylights18 wrote:

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As to when the bonds compound, I believe another poster on this thread said semi annual compounding means "May & Nov" so the poster would recommending buying in "April & Oct". If there is no advantage to timing your purchase then there is no reason to buy them in bulk at once.

You misinterpreted that a bit. I Bonds compound every 6 months, based on the date of purchase. An I Bond purchased in November will compound the next May, but an I Bond purchased in December will compound the next June. May and November are just the months when the new variable rate is set. The new variable rate applies to all new I Bonds purchased in the next six months. The initial rate is guaranteed for 6 months from date of purchase, and then is adjusted after 6 months and every 6 months thereafter to match the current variable rate.

The reason why April and October are good dates to buy is because periods of high inflation tend to be short-lived. If you buy today, you'll get 12 months at a high rate, first 7.12%, and then 9.62%. That's locked in. But if you buy after May 1st, you're only guaranteed 6 months at 9.65%. If inflation drops by November, your overall 12 month rate might be much lower. Even if you hold the bond for a longer period, the average inflation during that period is likely to be much less than 7.12%. So having that initial 6 month period at 7.12% means an I Bond bought today and held for 5 years is almost certainly going to be worth more than an I Bond bought next week and held for 5 years.

Reference: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

[tortoise_credit]

I completely agree with everything @Anonymalous says.

@Citylights18 I am still not sure what you mean by underperforming years. Withdrawing $1,000 from a $50,000 bond earning 9.62% versus withdrawing $1,000 from a $2,000 bond earning 9.62% has the same exact effect. Compounding doesn't work like you're explaining.

[Anonymalous]

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@Citylights18 wrote:

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Most people are in a job for a while and stock away money which they'd like to see grow and have a level of immediate access to. If they lose their job the emergency plan might be to immediately move back in with parents or sell their home. They will tap into some of that money they put away but most likely they'll deplete 25k to 18k over a job loss. The emergency fund concept where you'll keep $7500 in a seperate savings account doesn't appeal as much as having 25k in a mutual fund that can grow together.

This is why I believe $800 a month after 6 month savings in reserve is pulled together could be a workable plan. If the said person gets in trouble or if they feell like the I-Bond rate is low they can stop contributing. Better than saying they have 20,000 and sticking 10,000 (1/2 of their savings/emergency fund) into I-Bonds because they are excited about the CPI-U number.

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Emergency funds shouldn't be volatile, so most mutual funds are a bad idea. Prime or government bonds are okay, as long as the money can be withdrawn immediately -- money market funds are good, buying long term treasuries directly is not. Cash and CDs are also good choices.

You're correct that I Bonds have some liquidity issues. Any money you throw into I Bonds is tied up for a year, so if that money was half your emergency fund, you'll be caught short if something happens. But after that 1 year window (the 3 month penalty is irrelevant), I Bonds work fine in an emergency fund. @tortoise_credit mentioned the long term play earlier, which is to slowly convert an emergency fund into I Bonds. Each year, put aside some extra money, and invest it I Bonds. Then after those I Bonds become redeemable, withdraw an equivalent amount from the emergency fund and put it into a new batch of I Bonds. If someone invests the equivalent of 20% of their emergency fund in I Bonds each year, their emergency fund can be 100% I Bonds after 6 years.

In the short term, you're also correct. Emergency funds should be immediately accessible. If someone wants to buy I Bonds now because rates are high, they should get the money from somewhere else, and not deplete their emergency fund to do it. Whether someone can take advantage of the current high rates will depend on their current reserves.

It seems like you have low reserves, so you're focusing on cash flow and a schedule of future purchases. Which is great, putting away money a regular basis is a classic way to invest, and I Bonds are a good option even if you miss the April window. But I'm concerned about the PLOC. In general, I don't recommend investing with leveraged money, which seems to be part of your plan. Even if you can arbitrage the difference between the expected return on an investment and the APR of a loan, you're taking on significant additional risk. Because if you run into a cash flow crunch you might miss a few payments, and suffer all the negative consequences of a default. I don't think that's worth it for a few percent.

[Anonymalous]

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@Citylights18 wrote:

-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.

(I'm slowly catching up with the thread, so apologies if any of this has been covered.)

One thing to remember is that the fixed rate for I Bonds in September 1998 was 3.4%, while today and for the foreseeable future it's 0%. That rate is based on the date the bond was issued, and is a permanent feature of the bond that applies to all future years. So while some of the increase in the value is due to time in the market, a big part is the specific time when the bond was purchased. If you bought an I Bond in 9/98 that's currently worth $3,700, and today bought a brand new I Bond worth $3,700, then in 5 years the 1998 I Bond will be worth considerably more. 1998 I Bonds are a better long term investment than 2022 I Bonds.

Also, the calculator includes the 3 months penalty, if the redemption period is less than 5 years. It's not starting accural at the 4th month; it's just not including the last 3 months of interest.

[Citylights18]

The entire point of what I've been trying to convey in all of these posts is setting your money aside in I-Bonds is an alternative to plain cash, CD's or stablecoins (cracked down on by the SEC). The numbers that I've run from the Treasury Direct website prove that you'll get the most benefit from I-Bonds if you can leave them set ideally for a longer duration.

The best strategy I believe for doing so for the typical person is to buy I-Bonds regularly on a monthly basis treating it like a deferred interest savings account. This way also gives you discretionary power if you do want to load up at November for a new CPI-U number rather than accept the lower current CPI-U. Inflation has been determined to not be transitory at this point and the Fed has limited ability to influence it with higher rates and selling assets. Supply and demand imbalances and labor shortages are a feature of the current economic era.

There is no point to having an account sperately labled as "emergency fund" from your other savings. I would not deplete your checking/savings account by 20% a year to purchase I-Bonds as a system because that money is in place not as an emergency fund but in case if a check bounces. What funds a person could have access to in the event of an emergency is important but that can include money like what is in your HSA (assuming a medical related emergency). Having good insurance is one of the best ways to negate potential impacts of an emergency.

The financial "experts" on here promote the idea low cost, high deductible insurance and take the savings from that to be socked away into an "emergency" fund. Maxing out tax advantaged spending accounts and running a lower deductible so an event won't wipe you out is a better idea. Particularly when these accounts cover the whole family. But don't tell that to the penny pincher financial experts on here.

[GatorGuy]

Read this whole thread. Seems like a lot of details just to say I use a PLOC to buy bonds that I don't have the cash to use (or want to use). Obviously as long as your interest expense is lower than your return then it makes sense. 

Risks include running into a cash crunch. Or if you have a variable rate on your PLOC then your rate may rise while funds are tied up for a year. 

Because of the cap on how much you can buy, it's all this work and some risk for maybe a few hundred dollars extra. 

[GatorGuy]

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@Citylights18 wrote:

The entire point of what I've been trying to convey in all of these posts is setting your money aside in I-Bonds is an alternative to plain cash, CD's or stablecoins (cracked down on by the SEC). The numbers that I've run from the Treasury Direct website prove that you'll get the most benefit from I-Bonds if you can leave them set ideally for a longer duration.

The best strategy I believe for doing so for the typical person is to buy I-Bonds regularly on a monthly basis treating it like a deferred interest savings account. This way also gives you discretionary power if you do want to load up at November for a new CPI-U number rather than accept the lower current CPI-U. Inflation has been determined to not be transitory at this point and the Fed has limited ability to influence it with higher rates and selling assets. Supply and demand imbalances and labor shortages are a feature of the current economic era.

There is no point to having an account sperately labled as "emergency fund" from your other savings. I would not deplete your checking/savings account by 20% a year to purchase I-Bonds as a system because that money is in place not as an emergency fund but in case if a check bounces. What funds a person could have access to in the event of an emergency is important but that can include money like what is in your HSA (assuming a medical related emergency). Having good insurance is one of the best ways to negate potential impacts of an emergency.

The financial "experts" on here promote the idea low cost, high deductible insurance and take the savings from that to be socked away into an "emergency" fund. Maxing out tax advantaged spending accounts and running a lower deductible so an event won't wipe you out is a better idea. Particularly when these accounts cover the whole family. But don't tell that to the penny pincher financial experts on here.

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I disagree with the bolded. Most EFs are 3 to 6 months of expenses. Usually tens of thousands of dollars. That's a really big cushion if you are using that to make sure you don't have an overdraft. 

Most people use an EF for unexpected large expenses or losing their income not float in their bank accounts.