Here are the advantages and disadvantages of IBonds that make it better than savings but little less liquid. In my previous post I mention what role do savings account play.
- Liquid asset. It is the closest to cash/savings compared to any other investment vehicle.
- Guaranteed rate of return. This has fixed rate of return + variable rate based on semi annual inflation based on CPI.
- Inflation protected, thus you don't have to worry about inflation at all.
- Local and State tax exempt.
- You never lose money as these are U.S. govt. backed.
- Withdrawal limits. One cannot withdraw within one year of ownership. You need to own them for at least one year. If money is withdrawn within 5 years there is a 3 month most recent 3 months interest penalty.
I think these bonds are great place to keep most of your savings after 5 years but you can't keep all your savings in IBonds as there is a 3 month interest penalty if you withdraw before 5 years. So, in case of emergency before 5 years, you might loose some money but the difference in ROI still makes it worthwhile keeping 80% of your savings after 15 months. Thus, start with keeping some of your savings in IBonds and after a year start moving funds slowly. This is almost like a CD except that the rate is inflation protected in IBonds and there is absolutely no penalty to withdraw anytime after 5 years.