Suggestions on laddering money saved for TRUE expenses - I-bonds > T-bills >MoneyMarked Funds > ??

I usually put cash in my bank account (BOA) for items which are my TRUE expenses such as:-

- Emergency funds -  6-month of expenses savings

- HSA OOP medical funds(Annually),
- Property Tax(Semi-Annually)

- Insurance  (Semi-Annually)

- Parent's funds(Quarterly),

-Estimated Taxes(Quarterly)

I am aware about the I-bonds limitation w.r.t ,redemption for expenses will start after 1 year, with 3 months EarlyWithdrawalPenalty and no penalty after 5 years.

Thoughts:-

Wondering if it makes sense to ladder this into I-bonds monthly, to dump this cash there?

OR

Are there any better options available for above secured-cash, since I would need these amount at some interval for sure for above expenses?

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  • My I Bonds and savings and money market accounts are just part of my budget. I don't actually ladder anything. I buy I bonds every month, and the only time we stopped was when were about to move in order to build up some cash reserves. Savings accounts and money markets are fairly equivalent in terms of liquidity. This is more about cashflow needs than about what budget categories are stored where.

    Also consider that I Bonds are tax deferred, so you need to consider the tax hit if you draw a large amount all at once. Additionally taxes are due at the end of the 30th year when they stop accruing interest if they have not been cashed earlier.

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  • nolesrule said:
    more about cashflow need

     Can you elaborate on this further re:cashflow needs and how you create the portfolio structure based on it? My plan was to see which gives a better yield in a risk-free manner, since expenses cost are fixed, and hence cannot risk principal in the stock market for such

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Sky Blue Harp other then I bonds and t-bills you can move money around between any of these types of accounts easily at any time. So it's really just a matter of knowing what you don't need in your checking account and picking the best option. 

      I used to do laddering but reaching for yields with semi or non liquid options isn't worth the time or effort involved. 

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  • This is a timely question. Overall, the philosophy I've come around to is, "The interest rate I earn on my cash isn't going to make a big difference in either the short or long run. So it's worth taking steps to maximize it, but only if those steps aren't going to cost me much in time, liquidity, or complexity."

    So right now that means a combination of an online savings account (Ally, currently at 1.5%—not the best rate out there, but far from the worst), I-bonds (I also contribute monthly), and a Vanguard MMF, which is now paying much less than Ally. The only reason I haven't transferred the Vanguard balance to Ally is that I know the day I do, Ally is going to chop their rate in half. 😬

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 3 mths ago
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      Matthew Great points. I recently moved all my Vanguard cash to Barclays at 1.6% which has consistently stayed 0.1% ahead of Ally which I also have. I've personally stayed out of I-bonds and CDs recently. Liquidity is king. Because of this, I was recently able to take advantage of Ally's bonus for an additional $250 for a $25,000 deposit.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Matthew 

      Matthew said:
      Overall, the philosophy I've come around to is, "The interest rate I earn on my cash isn't going to make a big difference in either the short or long run. So it's worth taking steps to maximize it, but only if those steps aren't going to cost me much in time, liquidity, or complexity."

       You know, I had this very thought in my head when I was replying but forgot to write it down. It's the reason I dumped ladders a few years ago. other than I Bonds, I just move money back and forth between Vanguard, Capital One, Ally and Discover, where I already have accounts. lately it's mostly back at Capital One.

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    • Matthew nolesrule  Thanks for your inputs. How do you plan to use your I-bond portfolio? Are you visualizing it to be used after 30 years? OR you plan to withdraw yearly?  I plan to prepare my "personal investment policy statement" and I usually put justifying explanations for myself, so that whenever I question my decision, I go back and check, what where my findings, and why I do things certain way.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Sky Blue Harp Yes, my plan is to hold I Bonds to maturity, but if I don't it's not the end of the world. My monthly purchase amount comes to about 2 months of spending per year. So at first, my plan was to limit it to about 50% of my Income Replacement, which was 6 months expenses.

      Now, I'm in a bit of a different boat in that I've actually merged all of my taxable investing into my budget, which includes a brokerage account holding stocks. I don't recommend this for most people. But I did this after a thorough analysis in which I discovered that if I included all my cash in my budget as fixed income in my portfolio, then I still had a reasonable 60/40 asset allocation.

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    • Sky Blue Harp I'm also planning to hold to maturity, but I'm fine with being flexible as long as I'm avoiding the <5 year penalty. It's possible some of them might be used for college expenses, but we'll see how that goes!

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  • At the very least get your cash out of BOA. You can get a better interest rate online. You just need to allow 2-3 days for transfer time.

    Like 4
  • All my true expenses money and my E-fund money is in a HYSA at Ally.  Their rate is now 1.5%, but I doubt it will stay there for long with the recent further drops in the treasury interest rates.  I am going to save up 6 months expenses there and am saving for the type of true expenses you talk about, at least those that aren't paid out of my escrow account.  I'm not wishing I had just said no to the escrow account and done it myself to earn a little interest on my true expenses as I'm saving for them, but it is nice to know those bills are taken care of and not my problem, even if it means missing out some interest.  I have enough to deal with already.  I've never bought I-bonds, although with the way we are printing money right now, maybe I should, but I doubt I would want to put true expenses there because I need to draw on them often and what I'm doing now is easy.

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 3 mths ago
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      PhysicsGal Keep doing what you're doing for now. You'll know when you can start experimenting for greater returns with deeper funds. After you've been YNABing long enough, you'll have almost every true expense accounted for.

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  • Is the overall consensus to keep money for True Expenses in a savings account with a decent interest rate? 

    I'm trying to relate what I'm reading here to Canadian equivalents, but the offerings between US and Canada are quite different. 

    To help stay ahead of yearly inflation, I put a portion of my cash reserves into a short-term GIC ladder, which is most similar to CDs, I think. Rates vary depending on the institution but my intent is to get ahead by the following year by the rate of inflation as the value of savings inevitably decreases. I also supplement with regular contributions. 

    This kind of money needs to remain liquid and retain as much value as possible in order to help in a tight spot (like emergency savings). Investing it isn't an option and using a GIC ladder is just enough. I'm hoping to discover a middle ground. Maybe it's wishful thinking. I'd like to hear others' thoughts.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Turquoise Lamp The consensus is to keep money you don't immediately need to spend in liquid high yield accounts (savings/MM).

      The problem with the GIC / CD ladder is that for small amounts the incremental interest isn't worth the time or effort to set up additional accounts.

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    • Turquoise Lamp GICs (which, yes, are the equivalent of CDs in the US) have no protection against unexpected inflation, and if unexpected inflation does show up, you're stuck either riding out the GICs with now below-market interest rates, or paying a penalty to break them.

      Canada has Real Return Bonds, which I think are the equivalent of US TIPS, but the US version really isn't appropriate for laddering in a taxable account, except in unusual circumstances (not now!).

      The US also has something called I-bonds, which are federal savings bonds that offer protection against unexpected inflation. A quick Google search suggests that Canada doesn't offer anything similar, and in fact discontinued savings bonds entirely in 2017(?).

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