Consider iBonds for your Emergency Fund

As a freelancer and entrepreneur, it’s a good idea to have 6 months to a year of living expenses saved up in emergency funds, in case your business doesn’t perform as well as it has in the past.

You’ll want this in risk free investments – keep this money out of the stock market. You’re more likely to need this when the economy tanks and people can’t afford your services, and that’s exactly when the stock market is going down.

But the problem with a risk free investment like a savings account is that you don’t make much on it. You actually lose money when you consider inflation. If you’re earning .1% a year (nominal return), but inflation is 2% a year, your real return is -1.9% a year.

iBonds to the Rescue

The government releases savings bonds to encourage individuals to save. Forget that they’re called bonds – just think of them as the best savings account on the market.

They pay you two interest rates. The first is the nominal rate, just like your normal savings account. Right now this is .2%, which is comparable to what you can find at your local bank. But they also provide an inflation adjustment, which turns that .2% nominal into a .2% real rate of return. You get a monthly inflation adjustment based on what the inflation looked like over the past 6 months. More information at TreasuryDirect.

They last 30 years, but you can’t sell them in the first year. It’s equivalent to having a 1 year CD at a bank which then rolls into a savings account. Once that first year has passed, you can sell any time and any amount you like.

They’re tax deferred, which means you don’t pay taxes on the interest until you sell the bonds. If you’ve maxed out your existing tax-deferred space (IRA), this a great way to expand it. And if you sell them to pay for qualified education expenses (like your child’s college education), you never have to pay taxes on them.

You’re limited to $10,000 per year, per social security number. So if you’re married, you can get $20,000 a year through Treasury Direct. There’s also a backdoor to get more – you’re able to receive your IRS tax refund as paper I Bonds (up to $5,000).

When I’m filing taxes in March or April, I figure out how much more I owe, then file Form 4868 requesting an extension and include a check for my total + $5,000. I watch my bank account, and once that’s cashed I file my actual tax return, including Form 8888 which states you want your refund as I Bonds (more details here).

I’ve always had a love/hate relationship with emergency funds. I love the security, but hated that it lost value every year. But now no matter how the market performs or where interest rates go, I know I’m receiving a positive real rate of return on my emergency cash, it’s risk free (backed by US Government), and accessible whenever I need it.

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Bill Erickson

Bill Erickson is the co-founder and lead developer at CultivateWP, a WordPress agency focusing on high performance sites for web publishers.

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  1. Steve and Sally Wharton says

    Hey Bill, Great tips and useful information. Freelancers and small enterprise independents in general are known to be lousy money-putter-awayers. Thanks for the reminder and the prudent suggestions about where to squirrel those hard-earned emergency iBenjamins. It makes makes good cents!

  2. Lynn says

    Thanks so much for taking the time to post these tips – especially appreciate the detail about the tax refund! What a great idea.

  3. Steve Blackwood says

    Thanks, Bill. Since you originally posted this, I’ve done my due diligence on iBonds, and have started migrating some of my emergency fund into iBonds (over time, to allow for the 1 year hold on redemption). Since my taxes were already filed this year, I’ve had to do this with electronic iBonds via the TreasuryDirect website, but I’m looking forward to tax time next year (ironic, I know) so I can get the extra $5000 in paper bonds. Thanks for the tip, it was very helpful! Be nice to not LOSE money on “cash” as savings accounts do now, without the risk of investing in a mutual fund or the hassle of laddering CDs.