Should You Invest Your Emergency Fund in I Bonds?

Most people keep their emergency funds in traditional savings accounts because of the safety and easy access they offer. However, some turn to I Bonds, which provide inflation protection and a guaranteed return, unlike regular savings accounts. While I Bonds are safe, they offer less access to your money when compared with a bank account, making them suitable for only part of an emergency fund. A financial advisor can help you determine if I Bonds are a good option for your finances.

What Are I Bonds?

Series I Savings Bonds (I Bonds) are bonds issued by the U.S. Treasury that provide a fixed interest rate plus an inflation-adjusted rate. These bonds are designed to protect the value of your money by keeping pace with inflation, making them an attractive option for long-term savings.

Unlike other bonds that might lose value when inflation rises, I Bonds adjust the interest rate they pay every six months based on the consumer price index (CPI) . This feature allows your investment to maintain its purchasing power over time.

I Bonds have a 30-year maturity period, meaning they can continue earning interest for up to three decades. However, they can be redeemed after just one year, which makes them somewhat flexible, though not as immediately accessible as a traditional savings account .

The limited access you'll have to any money you invest in an I Bond is an important consideration for an emergency fund, which ordinarily is kept in a highly liquid account. Another catch is that if an I Bond is redeemed before five years, the bondholder forfeits the last three months of interest.

4 Benefits of I Bonds

I Bonds offer several key benefits, particularly for those looking for a low-risk, inflation-protected investment. Here are four to consider:

• Inflation protection: One of the primary benefits of I Bonds is that they adjust for inflation . As the inflation rate rises, the variable portion of the bond's interest rate increases, helping you maintain the purchasing power of your money. This makes I Bonds a safe bet during periods of rising prices.
• Tax advantages: Interest earned on I Bonds is exempt from state and local taxes, which can be a significant advantage for individuals living in high-tax states. Federal taxes on the interest can also be deferred until the bond is cashed or matures. In some cases, I Bonds can also be used tax-free for qualifying educational expenses.
• Low risk: Backed by the U.S. government, I Bonds are considered one of the safest investment options available. You are guaranteed to receive the principal and earned interest, making them an excellent choice for risk-averse investors .
• Accessibility after one year: While I Bonds are a long-term investment, they can be accessed after one year, making them more liquid than other bonds. However, early redemption comes with the penalty of forfeiting the last three months of interest if redeemed before five years.

Should You Invest Your Emergency Fund in I Bonds?

If you want to invest your emergency fund in I Bonds, there are a few factors to consider first.

One of the main advantages of using I Bonds for your emergency fund is the inflation protection they offer. Traditional savings accounts generally offer low interest rates, which may not keep up with inflation. I Bonds ensure that your emergency fund maintains its purchasing power over time, even during periods of rising prices.

However, I Bonds are not as liquid as traditional savings accounts. While they can be redeemed after one year, you will forfeit the last three months of interest if you cash them out before five years.

If you anticipate needing immediate access to your emergency fund within a year or are uncomfortable with the idea of losing some interest, a high-yield savings account or money market fund may be a better option.

For those who already have a portion of their emergency fund in an easily accessible account, using I Bonds for part of their savings can be a smart way to balance growth and security. This strategy can allow you to keep a portion of your emergency fund liquid while letting the remainder earn inflation-adjusted interest through I Bonds.

How to Invest in I Bonds

Investing in I bonds is straightforward. Here are four basic steps to help you get started:

1. Open a TreasuryDirect account: To purchase I Bonds, you'll need to set up an account on TreasuryDirect, the U.S. government's official site for buying savings bonds. The process is simple, and you can link your bank account for easy transfers.
2. Decide how much to invest: Individuals can purchase up to $10,000 worth of electronic I Bonds per year through TreasuryDirect. You can also purchase an additional $5,000 in paper I Bonds using your federal tax refund. When considering how much of your emergency fund you want to invest in I Bonds, keep in mind that these funds will be less liquid than money held in a savings account.
3. Choose your investment date: I Bonds earn interest from the first day of the month you purchase them. If you're trying to maximize interest for a particular month, consider purchasing near the end of the month to get the full benefit of that month's interest without locking up your funds unnecessarily.
4. Track your investments: You can monitor your I Bonds’ value through your TreasuryDirect account. The interest earned is added to the bond's value every six months, so you'll see your savings grow over time.

Bottom Line

Using I Bonds as part of your emergency fund strategy can protect your savings from inflation while earning a guaranteed return. However, weigh these with the relative lack of liquidity when compared with traditional savings accounts. For those who already have easily accessible funds for immediate emergencies, investing a portion of your emergency fund in I Bonds can help ensure that your savings grow and retain their value over time. But, in order to have immediate access to your money during and emergency, a traditional savings account may be your most reliable option.

Tips for Financial Planning

• A financial advisor can help you create a personalized financial plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Use SmartAsset's inflation calculator to see how much rising prices could eat into the purchasing power of your funds.

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