How much is $500 worth?
Posted on May 27, 2022
In a way this is a silly question. $500 is worth $500, but in my case $500 isn’t worth much. Last week I locked up $10,000 of what I have in money market or interest-bearing checking to buy an I-Bond that I cannot redeem for a year. I’m going after at least $500 in more income, but I’m creating a headache for the normal way I manage our cash flow. I mixed up my phases: I’m not in the Safe and Invest phase for MORE; I’m in the Spend and Invest phase with the focus of DON’T RUN OUT OF MONEY. That $500 has almost nothing to do with the chances of running out of money. The $500 or so that I will earn that is tied up for a year isn’t worth the headache of messing up my plan for our monthly cash flow. I can’t wait to redeem my I-Bond on May 21, 2023.
== The I-Bond ==
I mentioned last week that I bought a $10,000 I-Bond. (This was not a painless process; I had to invest the time to figure out how to do it; it is not that clear as to how I get paid interest and how I redeem the bonds. I show some added detail here.) I will earn at least $500 more – maybe $650 more – this next 12 months than the alternative of ~$25 per year that I earn on $10,000 that I keep in our money market at Fidelity.
But I’ve locked up that $10,000. I cannot access it for our spending until May 2023. That throws my standard planning for our cash flow for the year out of kilter. Here is my standard process: In early December 2021, I sold the securities for our Safe Spending Amount (SSA; Chapter 2, Nest Egg Care). I withheld the taxes that I forecasted for our 2021 tax return when I distributed for our RMDs. I therefore got net cash for our spending in the upcoming year. I pay that total out monthly from our account at Fidelity to our checking account. By the end of November 2022, before my next sale for our SSA for 2023, I don’t have much cash in money market (MMKT) at Fidelity. I may have some excess cash in our checking that we did not spend, but I’ll typically donate that or give it to heirs.
Example: Let’s assume our SSA for 2022 was $75,000 and I withheld $15,000 for taxes in December when took our RMDs. Our net cash for our spending in 2022 was $60,000. Starting with December, I then (basically) paid $5,000 per month to our checking account for the next 12-months. That’s our regular paycheck from our next egg; it comes in like clockwork like our net pay from Social Security. At the end of November 2022, I have paid out the $60,000 and have ~no cash in our money marker at Fidelity until I sell for next year’s SSA.
I bought the I-bond last week and, in essence, took the $10,000 from our Fidelity MMKT. (It made no sense to me to sell stocks or bonds in their depressed state; I’m hoping they both rebound in value to much more than 5% or 6% in a year.) That means I now forecast to be ~$0 in money market at Fidelity as the end of September and not the end of November. I won’t get a paycheck from Fidelity for two months unless I break my pattern of when and how much I sell at the end of the year. (And this year, I think I’d like to delay selling for our SSA as long as possible.) Maybe my process is too mechanical for you, but it’s the way I’ve done it for eight years to make sure I pay out our full SSA and do not spend one dime more.
The incentives for our spending are wrong, too. Unless I do something different than my usual cycle of selling in the first week of December, by brain tells me we should spend less now or plan to donate or gift less to heirs at the end of the year, and that’s the EXACT OPPOSITE thought I want to have. I want to see that cash rolling in every month that signals, “You have plenty of income. Figure out what to spend it on that will be FUN. If any is left, you have the pleasant task of deciding who gets it.”
Conclusion: Last week I bought a $10,000 I-bond. I thought it wouldn’t bother me to tie $10,000 up for a year. Now that I think about it, it is a hassle. It’s messed up my routine for our cash plan for the year. Right now I won’t have enough at Fidelity for our paychecks into our checking account for October and November. I have a different perspective on the $500 or more that I’ll earn from the I-Bond: the hassle isn’t worth $500. I cannot wait to sell my I-bond on May 21, 2023.