If i have a card that gives only 1%, will it still be as beneficial?

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<< I think people focus too much on the 3 month interest penalty for cashing prior to 5 years. >>

Agreed--absolutely right. SIS has made much the same point in other threads, and you are right that with excellent CC timing, the loss is all but entirely offest anyway.

<< Putting these expenses on the rewards CC, using grace period, and then paying bill when due with bonds as necessary, provides sufficient liquidity for me. >>

Makes sense. So you aren't redeeming every i-bonds on the first possible date only to immediately HAVE to pay a new CC bill due from the last flip...in some cases you'll hold longer, pay bills, etc. To the extent one does this, one reduces the problem of reduced liquidity.

By investment portfolio, I also meant how do they fit in your strategy--i.e. stocks, real estate, retirement accounts, etc. E.G. for someone nearing retirement, it's prudent to take on somewhat less risk than if you're single and 25...also, with kids in college, you have needs for cash outflow in the short term. OTOH, 20 (not to say 25) years of officer's service to our nation entitles you to a pension that will offer a base of support keeping you out of the poorhouse, even before you qualify for SS, etc.--meaning you could plausibly be more agressive than a civilian in your situation with only a 401k to fall back on...

Here's my story in brief...I'm 33, dual-income no kids (probably 2-3 years till first comes along), $110K or so combined income (she's a lawyer, I'm a philosophy professor). I have all stocks, REITs, and cash (waiting to buy) in my and my wife's Roth IRAs (around $70K.) Maxing out both 401ks at $11.5K per year each, mostly in stocks, foreign stocks, and REITs again--balance must be around $50K in these. In my non-retirement, I have almost all cash and i-bonds at the moment, only because I'm looking to buy rental properties in the near future (else I would be in a larger diversified small-cap portfolio. no debts save a couple 0% CC offers and the house in Spokane WA (worth $160K after huge remodel but last officially appraised at $133K, with a 5.25 fixed Netbank HEL ($88K due) and a $23K DGB heloc at 3.85% (pre-Nov 2 rate structure.)

<< Best use of timing for optomizing returns and minimizing taxes. Currently in 27% tax bracket hoping to time sales to 'top-off' a possible 15% retirement tax bracket. >>

I think that's a great idea for discussion!

To begin with, you're surely aware of the nice tax break you get with i-bonds paying for kid's college like that? A sweet deal--they might be tax free for you.

As for taxes, I wonder if you itemize? if so, it would be a big argument for deploying a HEL or HELOC somewhere in your strategy, I think.

(BTW, I was intrigued that their school allows for fee-free CC payments for tutiion...nice perk...I wonder if most do that now.)

<< The grace periods are complements of the CCCs. >>

No question that's right.

<< Not sure how much they pay CCCs, but I believe they would get a better rate than your average Mom/Pop convenience store. >>

Definitely, and it would be great to get definitive information on this (anyone have a high-placed friend at Treasury?). But I'd be VERY surprised if it were less than 2.5-3%, ESPECIALLY since it's internet based transactions--the most expensive kind to buy because of security issues. And that's off the top, every time someone buys.

<< Printing costs should be cheaper than printing dollars, single vice two sided printing. >>

Gotta disagree with this. Bills get produced in MASS quantities, and aren't keyed to individual holders, SS#s, etc. Bonds get custom-made, cross-checked, dated, shipped, etc. The % hit would be much lower here on bigger denominations, but I'd bet it isn't a trivial amount for all but the spendiest bonds.

<< More debt in Savings Bonds means less in treasury bonds, etc..... >>

Since those are held mostly by institutional investors, not available on credit, and often bought/traded in big quantities, expenses should be trivial by comparision.

Moreover, we're still not considering factors like expense of redeeming. You know the bank gets a cut (1% maybe? Bet that's conservative) for redeeming the bonds on demand after 6 months. Here's a guess as to how this works:

I buy a $1,000 bond on Dec 29.

Gov't gets $975 (100-2.5% of face) on Jan 2 from their CC vendor for my bond.

Gov't spends $10 on printing, running security, processing, mailing, and tracking my bond over course of its life (down to $965.)

I redeem bond on June 1 at local bank (earlist date.) Bank pays me $1000+ ($13 = (6 months interest - 3m penalty)) = $1013.

Bank hits up gov't on June 10 for $1013 + 1% processing fee = $1023.

Bottom line For use of my : Gov't gets use of my money for just over 5 months. For this, they pay $1013 (redemption payment) - $965 (my money net costs and fees) = $48 = ~5%. Their cost is worse than 13% APR, under conservative assumptions. (Anyone who knows anything about lobbying power of banks, CCs, etc. vs. the Tresury would probably call this naively optimistic on my part!) They could do MUCH better selling treasury bills at %2-3% plus much smaller costs. They loose BIG.

Now (and here's the key That roughly 5% should be their cost regardless of whether I hold the bond 4 months or 30 years. And if I hold it just 5 years (the minimum before they assess me a penalty), their cost of borrowing that money is just 1% above whatever interest they pay me. At that point, they're likely coming out OK, esp since the debt is longer term. If I hold 25 years, it drops to .2% above that--truly trivial.

Assuming I'm right (and of course I might be wrong), does this make flipping bonds shady behavior? Not at all--it's a contractual agreement between buyer and gov't that the buyer is agreeing to exactly. But would it give me pause before making it the cornerstone of my investment strategy?

Well, yes. I'd do this to a corporation in the business of making a profit without a second thought. Their job is to look after the bottom line, and frankly they deserve to go out of business if they don't. But things are more complex with the govt. They are charged to give small investors good investing opportunities (like i-bonds) rather than just make profits, they are subject to political oversight and public policy goals (hence exceptions for disaster relief and tax-free redemptions for education), etc. etc. And in the end, as silly as it sounds, all Americans loose if the gov't looses.

Moreover, if I'm right, sooner or later the government will decide that it would rather prevent itself from paying over 13% APR even if it meant little guys couldn't buy bonds with CCs. And I'd hate to see that.

Well, this post is way too long already, so I'll stop there for the moment. Perhaps more informed or awake minds can correct or complement my reasoning here?

Edit 11/23/02 to correct typos on dates in redemption example above (Dec 29 not 31, June 1 not May 1). Thanks cak144, mshen11, and taylor.

But I'd be VERY surprised if it were less than 2.5-3%, ESPECIALLY since it's internet based transactions--the most expensive kind to buy because of security issues.

I see this as being one of the safest transactions for the merchant and cc company. There is virtually no chance of fraud. Sure, you might be able to get the government to send you a bunch of bonds that you bought with a fraudulent card. But they are individually numbered, and you can't get the money for 6 months. They can refuse to redeem these thing if there is anything hinky in the transaction.

NOTaFool,

<< I don't think you're going to convince me. >>

Of what, that printing/distribution costs are non-trival, that the gov't looses big on "flipping," or that these arguments offer reasons to consider not flipping? Or all of the above?


Here's why I think the case of roads is disanalogous (warning: this might seem windy or sily, so feel free to skip!):

-When we drive on roads, we follow their express intent, even though doing so causes wear. Driving a lot is OK too. However, all else equal, we should be mindful of not causing undue problems with them...e.g. using studded tired when not needed or violating weight guidelines. Similarly when we buy i-bonds for an investment, we use them as designed--even if it turns out we need the money early. We don't do so when we flip them.

-We pay a user fee for using roads in the form of federal gas taxes. In that respect, we do pay our way. We pay no such fee for flipping bonds.

-roads are a program we as a society have agreed to pay for so that we all can benefit. We expect and are satisfied with "losing money" on these. I-bonds, OTOH, are a way for the government to raise revenue, made as convenient as possible for small investors. The main point is for the gov't to fund its debt affordably. That's not underminded by holding, per express intent of i-bonds, but is by flipping.


<< Also, if you feel you are not being taxed sufficiently to pay for the gov't services you are using >>

But this isn't my argument at all. I'm for taking every tax break I can, as permitted by law. LMK if I should make the distinction clearer...


<< Keep in mind even if someone buys a bond with intent to cash in 6 months, when the rates go down, it's awful hard giving up those bonds. At least for me and my 3% fixed + 2.92% variable bonds I first purchased. >>

That's interesting...why is that (sincere question)? You could make more by flipping...is it a psychological or a financial thing?

WSM and you are of course right that buying bonds should be one of the safest internet CC card transactions imaginable-I concur. But do you really think this means the gov't pays less than 2.5-3% on this transaction?

Admittedly, my figures here are all conjecture--albeit well informed ones, I think. I would be most curious to get real data on this.


Please let me reiterate--THE LAST thing I want to do is question ANYONE'S ethics, patriotism, motives, what have you. I know that there are legitimately different views on these issues, of which yours is certainly one. (Heck, I have yet to see a single other person on this board agree with my position, and obviously LOTS of bright, admirable folks on FW disagree!)

Also, my apologies if my last post on this thread was a little windy--you certainly got me thinking, and the professor in me might get a little carried away, LOL

Ibonds and a rewards CC is a great way to save for grad school/law school or any further graduate classes.

I PM'd Dave Hanson about it and found his reply to be worth noting.

1. I-bond interest is tax deductible if applied to education costs and if you're at least 24 years old.

2. Combining with a rewards CC makes the deal ever hotter.

I'm currently 24, and looking at business school in a few years, this might be a good way for other potential students to make a bunch of money in the near-time to fund their education expenses. Sure, you might want to hold the bonds instead of flipping them, but you miss out on the CC gain.

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<< Peace? >>

This first and most important--you bet! As far as I'm concerned, we were never at war! Nothing better than a good exchange of ideas when people respectfully disagree. That's my whole life as a scholar of philosophy, and I argue more ferociously than this for a living with many of my best friends.

And let me add publicly that in the couple of days you've been here, I think you've easily contributed more valuable info/experience/ideas to this board than I did in my first month.


<< Neither of us actually knows what the gov't cost is per purchase/sale >>

Most definitely, as I conceded above.

<< I really doubt it's anywhere near the amount you suggest. >>

Really? It might be beating a dead horse at this point, but I'd be curious to hear what sounds fishy to you (that goes for the rest of you too!) I actually suspect my numbers are pretty conservative--and if so, I don't think I've made any math errors.

<< If it is the gov't should stop selling bonds entirely, because it would be more advantageous to just sell treasuries period. >>

I don't think that follows. First, I'm sure that most folks who buy bonds still buy them and hold them long term, as they have done historically. When that happens, the gov't gets LONG debt granted for a reasonable price, rather than short term debt for a high (I argue) price. Of course that will change if flipping catches on enough, and I think we've agreed (?) that if that happens, i-bond purchases under current terms will end. Second, buying by CC is relatively new (anyone know exact date it started?) Without that, gov't doesn't do as badly with shorter redemptions. Third, the gov't isn't in the profit-making business alone, as I argued earlier. Getting rid of savings bonds would likly be politically difficult--there's symbolism, history, constituecies, etc. getting in the way.

<< I believe the caveat you mentioned is meant to explain the restrictions on cashing before 6 months and the penalty for cashing prior to 5 yrs rather than to suggest restricting or discouraging flipping. >>

Right--the context clearly is RE the 3-month penalty, and again, there's NOTHING AT ALL "restricting" flipping-no TOS, no laws, nothing. I simply was replying to your questioning of the "intent" of savings bonds.

<< If you buy a 5yr CD, the bank will likely disclose early withdrawals result in a six month interest forfeiture. >>

Once again, I dispute the analogy. You can't buy CDs with CCs--if you could, boy, I'd buy them like CRAZY, screw the 3 or 6 month interest penalty. And no bank in their right mind would do that--lots of FW readers and professional arbitragers would put them out of business so fast the CEOs head would spin. Plus, CDs aren't redeemable for cash at any bank--can only be redeemed at the bank you took them out at. Those are Crucial differences.

<< With decreasing interest rates it may actually be advantageous to the gov't for people to cash in bonds with higher interest rates to buy ones with lower rates. >>

Certainly true in theory. But who in their right mind would do that unless they were playing the credit card bonus angle? What would be the point? And that's where gov't loses.

I gather from your tax remark that it is remains unclear why I think the case of taking all legit tax deductions is different?

<< Still think thou dost protest too much, >>

? Not sure whether you're kidding here or not? If not, I'm not sure what you mean...?

<< I do like your site and the other info you've provided. Looking forward to your under construction additions! >>

Thanks! Whatever little value is there, you and other folks like you will make it better (you already have, in fact.)

BTW thanks for the clarification on educ deductabilty too...I think understand what you're saying, but I'm not sure how that would change my post (edit of edit?) You obviously know your stuff on this better than me...I'll change my post if you have a suggestion for making it read better.

Also, have you looked into bofi.com's bank accounts? You should be of at least boomer age, and with your sophisticated strategies (BTs, CC float maximization, etc.) it might really help you eek out every last buck with litle stress...sure has for me.

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