Series I Savings Bonds - should I budget for 3-month early withdrawal penalty?

Hi all, my wife and I have started moving some of our liquid on-budget savings over to Series I Savings Bonds, thanks to some super helpful advice on the forums here.  As I Bonds are currently earning 7.12% interest (!) and are guaranteed to keep up with inflation, yet are pretty liquid after one year, we're very happy to be doing so and I'm recommending them to as many folks as I can. 

The only downside I saw was the early withdrawal penalty of three months interest, if withdrawn before 5 years. I though it was well worth it, as the current interest rates more than make up for that penalty - otherwise this money would be sitting in our "high yield" savings account earning 0.4% interest. Our I Bonds are on budget, as I consider them to be a savings account of sorts, albeit very high yield and a little slower to access.

Given that it's a possibility we'll need to withdraw some before they've sat for five years, would folks recommend having a budget category for that three-month penalty and just keep a certain amount in there? For example, currently at 7.12% interest, $10k earns about $180 in three months. Or should I just not worry about it, and when I withdraw the funds, figure it out in the budget at that time? I'm drawn to the first option because I love me some true expenses, but I'm also drawn to the second option because the interest rates are always changing, and who knows how much I'll need to withdraw, so maybe not worth the hassle to try and keep that amount updated. What would you recommend?

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  • Whenever I consider a true expense, I consider what the WAM would look like to pay for the thing. When I was a broke broke graduate students, haircuts were a true expense because getting whapped with a $40 haircut on my $100/wk salary was untenable but $6/week per 8 weeks was fine. Now I can easily absorb $40 (and much larger charges) in a number of categories so I don't save up for things at that  level anymore. 

    If finding $180 wouldn't derail your budget too badly, I would probably not save it separately. For me that might come from something like vacation, and it would just mean one or two fewer nice meals on the next vacation. No big. On the other hand, if you'd liked like to know for sure that you would never have to have one fewer nice meals on vacation, make a category. 

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  • WordTenor that's a great point about the relative impact of $X on one's budget. We're fortunate to have enough of a cushion now where $180 would be relatively easy to scrounge up, though several years ago it might have been a jolt.

    The "True Expenses" mentality has really changed my financial world over the past decade of using YNAB, to the point where now I'm comfortable being a bit more of a "roll with the punches" guy if it affords a slightly simpler budget. We have a savings account for future daycare expenses, for example, knowing that when we have a second kiddo we wouldn't be able to pay for two daycare tuitions at the same time with current cashflow, so ought to have some savings built up. That could be a prime target for pulling a couple hundred dollars out of in a pinch.

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    • nolesrule
    • Stealing From the Future fix is an improvement but is incomplete....
    • nolesrule
    • 1 mth ago
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    • Reported - view

    The current value of the I Bond as shown in Treasury Direct already takes the 3 month interest penalty into account, so you don't need to account for it. This is why interest shows as $0 until the 4th month after purchase.

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    • nolesrule ah thank you! I was wondering why it took so long for interest to show up when I checked the site. This solves the issue!

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