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Savings bonds and emergency funds

Chris Farrell Jun 25, 2012

Question:  The place where I keep my emergency fund is in U.S. Treasury I-Series savings bonds. It is the best interest rate that I can find for “boring money” (also known as “safe money”). 

I realize it can take a couple of years to build up your balance because of annual contribution limits. And, worst-case scenario: If I need the cash before 5 years, I would lose 3 months of interest (or something like that). 

Is there any reason I wouldn’t want to keep the emergency fund there? Is there a dynamic that I am not considering? Dave, Denver, CO 

Answer: I’m a huge fan of U.S. savings bonds. I-bonds are terrific investments for emergency money. There’s no credit risk. You’ll make some money on your savings. The interest is tax-deferred until you cash in the savings bond. The bonds protect your savings from the ravages of inflation.  

You laid out the main drawbacks to using savings bonds as your emergency fund. It takes time to build up a balance that can be tapped in an emergency. You can’t redeem savings bonds until they’re 12 months old. If you cash them in during the first 5 years, you lose 3 months’ accrued interest.   

What I would do is consider your I-bonds as a second layer of “boring” savings. I would still put some money into a federally insured savings account — perhaps an online savings account. It’s the money you tap first when you’re hit with an unusual expense. The savings bonds are a backup to your savings account. You turn to the savings bonds when the savings account has been drawn down. 

In other words, I wouldn’t have all my emergency savings in I-bonds. I would split it between a savings account and the I-bonds.

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