I am potentially earning $40-80 on interest over a year, but I lose access to $1000 ear-marked specifically for emergencies.
If it's truly an emergency, then you're better off with $1000-inflation. Maybe get a high-yield savings account and split the difference ($20/yr, but access at any time).
I will concede that people have different definitions of "emergency" funds. I see it as, $500-1000 sitting in an account to deal with things that need to paid for now or else bad things will happen. So sudden car repairs and the like.
Other people call six months of wages an emergency fund. For these people, yeah, a ladder makes a lot of sense, but that's mostly because they never really expect to need the entire amount immediately (thus, IMHO, not really an emergency fund).
Start with an emergency fund, do this in place of investing on top of it, then after it is laddered replace the emergency fund with this and invest the former emergency fund (or gradually replace things over time as the lockup frees up).
It's still so much work and risk for almost no gain.
I have $1000, so I split it up $500 in cash, $500 in a bond. Next month, my car needs new tires or I can't get to work. New tires are $800, and I can't afford that half my emergency fund is tied up. I lost shifts at work because of this, but at least I got a $30 return (never mind each lost shift cost me $70).
Emergency funds are for high impact, unpredictable events.
I think the concepts of "emergency funds" being discussed are different here. There are the $1000 "I need cash now" emergency funds. Then there are the 6-12 month "I lost my job" emergency funds. I think you're discussing the former, while others are discussing the latter.
I agree with you that you should not put the former in anything less liquid than a savings account.
The latter, however, lends itself very nicely to laddering months of savings over months of layered investments. So that every month, the next month of your savings becomes free.
Emergency funds are a safety net when everything is crashing and you lose your job. This way you don't need to sell off your stocks which would be lower if there was a crash. Otherwise, you would be realizing your loses.
You seem to be looking a this from a someone that is young angle and doesn't have much expenses. My expenses are high, therefore my emergency fund is high. I keep $40k in cash, if can move $20k to I-Bonds that is $1600 a year. No other place will GUARANTEE that return. It took me all of 15 minutes. If you can offer me a greater GUARANTEED return I'm all ears.
You're not understanding. You always have $1000 of non-tied up funds. Start with $1000 cash. Then, instead of investing your next $500, put it in bonds. After a year, remove $500 cash from the emergency fund and invest it. You now have an emergency fund of $500 cash and $500 withdrawable bonds.
When people suggest using I bonds as emergency funds it's usually recommended in addition to at least a few thousand that remains in a savings/checking account for immediate withdrawal.
The liquidity requirement of an emergency fund varies based on the amount of savings capability a person has, and the type of emergency they want to save for.
Someone living paycheck to paycheck will likely need 100% liquidity, and someone who is wealthier might only need a single-digit percent liquidity.
Like a stock sale, you don't pay taxes on the interest until you cash in the bond (you can, but for most cases you shouldn't). It will be regular income rather than long-term capital gains however. A regular savings account will require you to pay taxes annually as regular income. I-Bond interest is not subject to state or local taxes, so there's a savings there compared to a savings account.
If you really hate paying taxes, you can cash them tax-free if you use them to pay for qualified educational expenses. There are income limits for this that probably eliminate the typical poster to this site but for people in the right situations it can be useful.
I just think the band-aid is absurd of the government paying you interest matching inflation which they themselves caused which is then taxed to go back to the government so they can spend it and cause more inflation.
Taxing it back causes deflation (or “counteracts inflation”.) They don't need to tax it to spend it, because the government has essentially infinite borrowing abiliry, so literally all taxing it back does is counteract inflation. (OTOH, giving you the inflation-indexed bond itself caused more inflation, so if your beef is with causing more inflation...)
I am potentially earning $40-80 on interest over a year, but I lose access to $1000 ear-marked specifically for emergencies.
If it's truly an emergency, then you're better off with $1000-inflation. Maybe get a high-yield savings account and split the difference ($20/yr, but access at any time).
I will concede that people have different definitions of "emergency" funds. I see it as, $500-1000 sitting in an account to deal with things that need to paid for now or else bad things will happen. So sudden car repairs and the like.
Other people call six months of wages an emergency fund. For these people, yeah, a ladder makes a lot of sense, but that's mostly because they never really expect to need the entire amount immediately (thus, IMHO, not really an emergency fund).