Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Move part of emergency fund from MM to short-term munis?
Old 07-02-2008, 09:16 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Aug 2004
Location: Houston
Posts: 1,448
Move part of emergency fund from MM to short-term munis?

We're a young married couple (no kids) who keeps about $5k in our checking account and $30k currently in the Vanguard tax-exempt money market (VMSXX), yielding 1.7%. Granted, it's tax free, but that's pretty dismal. This money is for emergencies, if there was a job loss or major unexpected expense. Today I looked at the Vanguard limited-term tax exempt bond fund (VMLTX) and it is yielding about 3.2%, almost double, and I am wondering if I should move half the money-market funds into the limited-term fund to chase some yield. The money-market yield has really declined this year, and I feel like it's dead money. Any other thoughts?

The limited-term fund has only a 2.5 year duration. 85% of its bonds are AAA/AA, 10% is A, and the remaining 5% is BBB. So it seems like limited credit and rate risk. According to Yahoo Finance, the worst year in it's 20-year history was 1994 when it only earned 0.07% (no losing years to date).
soupcxan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-02-2008, 09:51 AM   #2
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Posts: 1,490
i've held portions of my emergency fund in short/intermediate term funds, and would been burned on more than one occassion had i needed to access the $...
d is offline   Reply With Quote
Old 07-02-2008, 11:34 AM   #3
Full time employment: Posting here.
CitricAcid's Avatar
 
Join Date: May 2008
Posts: 546
It depends on the state of the U.S economy coming up and the inflation numbers. Generally, in times of high inflation, bonds do poorly as they do not update and reflect the rates of capital available to firms quickly, as well as raising interest rates by the Fed in response to inflation kills bond prices. It is only a personal reflection now, but bond funds wouldn't be where I would park my money in right now. I would definitely put my money in the bond fund over the MM fund, but if these were only for an emergency, what is wrong with putting the money in a broad index fund or something similar?
CitricAcid is offline   Reply With Quote
Old 07-02-2008, 11:41 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Nov 2007
Posts: 1,052
Am I too late with an opinion?
Run, do not walk, from limited maturity bond funds. I've yet to find the right environment for them and some of my biggest (and I mean BIGGEST) losses have come from these products. It seems in dropping interest rate environments they go down because of future rates dropping, and in rising interest rate environments, they go down because of current holdings. JMO.
Art G is offline   Reply With Quote
Old 07-03-2008, 01:04 PM   #5
Recycles dryer sheets
bamsphd's Avatar
 
Join Date: Nov 2005
Posts: 337
Quote:
Originally Posted by soupcxan View Post
The limited-term fund has only a 2.5 year duration. 85% of its bonds are AAA/AA, 10% is A, and the remaining 5% is BBB. So it seems like limited credit and rate risk. According to Yahoo Finance, the worst year in it's 20-year history was 1994 when it only earned 0.07% (no losing years to date).
For short term float I use MM funds to keep my tax returns simple, for "emergency" funds I use short-term bond funds. So if I wanted Tax-Exempt from Vanguard I would probably use Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX) which has a 1.2 year duration instead of the limited-term fund.

I don't think you are taking on too much additional financial risk if you use the limited-term fund instead. However, I think you might then be subject to Vanguard's frequent-trading policy, which only explicitly exempts MM and ST bond funds. How much of a problem that will be depends on your personal definition of "Emergency Fund." From previous threads on this board, some people expect multiple "emergencies" a year, while others think one or two per lifetime would be rather high.

I would definitely not use an equity fund for my emergency cash. Unfortunately a not-FI but suddenly RE emergency is both more likely and more severe during a recession/depression with associated bear market.
bamsphd is offline   Reply With Quote
Old 07-03-2008, 01:09 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
I think the economic climate for these is deteriorating, as a lot of state and local governments are reeling from dropping tax revenue (especially where the housing bubble is popping the loudest), increased energy expenses and looming retiree health/pension obligations.

I would stick to solid issues that aren't in economically sick areas, and I would stick with general obligation bonds that are backed by the full taxing authority of the issuing jurisdiction.

Not sure I like them in an emergency fund, though. If you don't think you'd need more than $10K in any six month period, laddering CDs six months apart is about as adventurous as I get.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 07-03-2008, 01:15 PM   #7
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,635
We keep a bit in HSBC MMA currently paying 3.5% (fully taxable). Seems to be a decent rate (although it is a bank and SLOW even with on-line ACH transfers). Linked to the other accounts it seems simple to just transfer money from very low rate accounts to HSBC and back when you need it.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Using your Roth as part of your emergency fund--good idea? CompoundInterestFan FIRE and Money 14 05-21-2007 12:08 AM
Corus Bank Short Term CDs on the move again MJ FIRE and Money 8 07-21-2005 04:41 PM
Ladder vs Short Term Bond Fund WilliamG FIRE and Money 10 03-12-2005 03:25 AM
Short Term Corp Fund, I-Bonds, or CDs? Bob_Smith FIRE and Money 17 12-14-2004 06:24 AM
Vanguard Limited Term Bond as emergency fund WanderALot FIRE and Money 3 09-20-2004 07:55 PM

» Quick Links

 
All times are GMT -6. The time now is 08:20 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.