Tuesday, May 4, 2010

Why Are I-Bonds So Confusing?

The fixed rate of the I-Bonds were announced yesterday and it's 0.2%, down from 0.3% in November. If you add in the inflation adjusted semi-annual rate, the composite rate for the period between 5/1/2010 - 10/31/2010 is 1.74%. Since the prior composite rate was 3.36%, I decided to front-load my planned purchases and bought $300 on April 29.

What's really confusing about I-Bonds, though, is that I really can't compare the current composite rate to APYs offered by banks since the I-Bond rates change every 6 months. Additionally, I noticed something peculiar about my I-Bonds.

I already knew that:
1.) The applicable composite rates are announced every May 1 and November 1;

2.) The composite rates are applied every 6 months from the month of purchase. For example, I-Bonds that I buy in January will have the current composite rate until June 30. (And February purchases will have the current rate until July 31, so on and so forth.) The new composite rate for the January I-Bond will apply between July 1 to December 31. The next composite rate change will take place anew on January 1.

Although that's simple enough, I also discovered that the interest doesn't start accruing until 3 months after purchase.

Using my January 2010 $50 I-bond purchase as an example:

1.) The applicable composite rate at that time was 3.36% and would apply until June 30, 2010. Since it was just announced that the new composite rate is 1.74%, the new rate would apply between July 1 and December 31, 2010.

2.) The 3.36% interest didn't start accruing, however, until April 1, 2010. The I-Bond will continue to accrue at 3.36% until September 30, 2010. The bond will accrue at the new rate of 1.74% between October 1, 2010 and March 31, 2010.

If I sold the I-Bond in January 2011, after the requisite 1-year holding period, I would be penalized 3 months' worth of interest. In this case, I'm wondering if I'll be penalized the 1.74% interest that I will be accruing between 10/1/2010 - 12/31/2010. If so, my January 2010 I-Bond would only have a net effective interest rate of about 1.78% (if I sold after only 1 year). If you take into account that it's exempt from state tax, I guess it still beats the current 12-month CD rates that are available out there.

But still, that's a lot less than the 3.36% interest rate that I thought I was getting. And I may have been better off just sticking my money into my SmartyPig savings account that's yielding 2.01%.

Sunday, May 2, 2010

April 2010 Progress Report

I've reached a pretty important milestone in April - my net worth is in the six-figures for the first time in my life! But... does this really reflect my current net worth?


Starting Debt (6/08)

Last MonthThis MonthDIFFERENCE
Private SL$49,528.99$39,111.05$37,742.72$(1,368.33)
Fed'l SL$55,852.68$53,170.49$53,034.22$(136.27)
Car Loan

Still chugging along with my snowball.

Ooooooh and I'm almost at the next milestone of going below the $90k mark. I'm also *this* close to paying off one of my private student loans that I took out to pay for my living expenses while I studied for the bar. This basically means that I'll be paying off my living expenses (rent, food, entertainment, etc.) from 1998 in 2010. *Shaking my head in disgust.*

Anyhow, reduced my debt 1.63% from last month. That's pretty good, right?





The savings I report here is with respect to my emergency fund savings only and does not include my future spending earmarks. I fell short on my monthly target to save $100 into my EF. Oopsie. Don't want to sound too defensive, but I had to pay boatloads of money in taxes this month (Federal $788 and State $2,318). But.... I'll also admit I over spent this month too. :-(





My "X"-Fund represents a part of my recent windfall that I'd set aside either as an emergency fund or a down-payment for my first home. Either way, it's money that I don't intend to touch unless it's for necessity or reinvestment.

I didn't put any extra money into this fund in April, so the increase represents the interest I accrued in my Everbank account. Sadly, the promotional 2.71% APY came to an end in March. From here on forward, I'll only be accruing ~1.26% of thereabouts, so I'll probably only earn about ~$30/month or so. Sucks.





Long story short, I'm pretending to pay myself an additional $55/month for a "hypothetical" return of premium (ROP) term life insurance policy. (I'm basically trying to "earn" back the term life insurance premiums through interest and investments.)

I've set aside $660 ($55 x 12) for this year's premium into my SmartyPig account that's earning 2.01% APY. But starting in June, I'll invest my hypothetical $55/month ROP premium into my IRA. Or I may buy savings bonds. Or I may just save or whatever.

Anyhow, my gamble is that over the long haul (i.e., 30 years, or during the period of time that I am paying for my life insurance premium), I can earn enough to cover the premiums paid. At this time, I'm estimating that the benchmark I need to beat is 3.98% APY.

Since I'm curious how this experiment will turn out, I'll be reporting about my returns/losses monthly. I've created a new category for "life insurance" in my net worth chart to map my progress.



I made it into the six-figure club!!! Hurray!

But my excitement is tempered by the nagging question of whether I should even count my 401k and my IRA as part of my current net worth, especially since I can't touch the money (without penalty and ungodly taxes) for another couple of decades.

If I omit my 401k and IRAs, my net worth is... -$43,285.19. Ugh. If that number ain't demotivating, I don't know what is. I'll continue to include my retirement accounts in my monthly net worth, thank you very much.

The breakdown and the history of my net worth can be seen here.