Did you take my advice and buy series I bonds between May of 2022 and November of 2022 and earn 9.62% for the first six months and then 6.48% for the second 6 months? Great trade! But itʼs time to reevaluate the fixed income landscape.

These Series I bonds purchased between May and November of 2022 now only yield 3.94%. This yield is made up of a 0% fixed rate plus an inflation rate of 3.94%. Compare that to a yield of 5.27% for newly issued Series I bonds made up of a fixed rate of 1.3% plus inflation of 3.97%. In other words, the old Series I bonds have a “real return”, or return adjusted for inflation, of 0% and the new ones have a real return of 1.3%. A plain vanilla 3 month Treasury bill without any liquidity restrictions is currently yielding between 5.3 and 5.4%.

Powell and the Fed seem confident they will be able to successfully bring inflation down to the 2% target without tipping the economy into recession, so holding a Series I bond that pays only inflation is essentially fighting the Fed, which typically doesnʼt bode well for investments. Depending on your unique situation, it may be time to cash in and move the money to more productive investments.

Saving for college or a disabled family member? You may be able to avoid paying income tax on the interest! Schedule a meeting to find out: calendly.com/komichcapital/30min

In Marvin Gaye’s cool jam, “Trouble Man”, he sings, “There are only three things for sure, taxes, death, and trouble, oh this I know.” Financial advisors help us avoid taxes, and life insurance policies protect our families’ finances from unexpected death, but how do we prepare for trouble? I start every financial plan with the Safety Net because it is the foundation upon which the rest of the plan is built, and it is also the foundation upon which we can confidently stand and take wealth-building risks in other parts of our portfolio. Let’s explore the appropriate size of the Safety Net and its potential components.

The general rule of thumb measures the size of a proper emergency fund as six to twelve months’ worth of expenses. For example, if your mortgage payment, car payment, utilities groceries, and miscellaneous spending add up to $10,000/month, your emergency fund should have somewhere between $60,000 and $120,000. Like all personal finance, determining the size of an emergency fund is a combination of mathematical formulas and personal reflection.

Risk-averse people may want twelve months or more whereas a risk seeker may only want six months. Investors should also consider how reliable and consistent their sources of income are. For example, a salesperson with little or no base salary and inconsistent commissions should opt for a much larger emergency fund. A federal employee with a steady paycheck and future pension may opt for a lower emergency fund.

Let’s assume you work with your financial advisor and together you determine that your emergency fund should be 10 months, or $100,000. That does not mean that you let $100,000 sit in your checking account earning zero interest. In fact, I recommend only keeping two, or three months at most, worth of expenses in a checking account to smooth out the variability in month-to-month spending. We would use the remaining $70,0000 to $80,000 to buy safe and easily accessible assets, such as short-term US treasuries and CDs, which, at the time of this writing yield over 5%.

Having sufficient safe, liquid assets in your Safety Net will cover unexpected expenses and losses of income when trouble inevitably comes. It will also give you the necessary cushion so you do not have to dip into your long-term investments, which will almost certainly be down when you face trouble personally. Now is a great time to get your Safety Net in order, and you may feel like Marvin Gaye at the end of the song, “Don't care what the weather. Don't care 'bout no trouble, got me together, I feel the kind of protection that's all around me.”

Tune in next month when we explore another component of the Safety Net, a HELOC!

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