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Putting emergency fund into bonds
Old 08-10-2014, 09:49 PM   #1
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Putting emergency fund into bonds

Hi all, I have $15k in a CD for an emergency fund. The interest rate is 1.54%. I have a low penalty of 2 months interest, maybe $50 to withdraw the money. I'm thinking I'm better off putting the money to work in a taxable account in a Vanguard bond fund. I'm considering VBILX (intermediate bonds) or the Total Bond Fund. I guess I'm just not sure if it is worth chasing a return for an emergency fund but I also pride myself on efficiency and putting my money to work. Your thoughts?

Any help is appreciated.

Dave
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Old 08-10-2014, 09:57 PM   #2
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I keep my emergency fund in index stocks that are no different than the rest of my overall portfolio. You just have to promise yourself that if the market drops, you shore it up. In 4-5 years, the growth will probably be well worth it for you and you'll have a much bigger cushion. Fwiw, i keep mine mostly in foreign funds, because its a taxable account i want the foreign tax credits that i dont get to use in my deferred accounts.


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Old 08-10-2014, 10:25 PM   #3
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Most of my emergency funds are in cash or cash equivalents. But I also have a Vanguard bond fund that I can also use for a "bigger emergency". I like that the account has checkwriting privileges so it's very liquid. I'd think that would be less hassle than taking your money out of a CD before it matures. For me, it's not about the added return - it's about the liquidity and ease of access.

You also may want to consider going to a short term instead of an intermediate bond fund as they would probably have less price volatility when interest rates go up. But again, it's a decision you have to make balancing price volatility versus return. The intermediate bond fund should have a higher return.
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Old 08-10-2014, 10:47 PM   #4
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I have a 2-tiered approach to emergency funds. My first tier is a small amount (about $750) in my local bank's checking account used to cover any small, unforeseen expenses which may arise in a given month. This amount is above the minimum balances needed to avoid monthly fees. I dip into this cushion often but replace the money within a month or two.

My second tier is a lot like David1961's. I keep about $40k in an intermediate-term muni bond fund which is part of the bond portion of my overall portfolio. This fund has checkwriting privileges which makes it more easily accessible than if it lacked this feature, forcing me to wait 1 or 2 business days to electronically transfer money into my local bank's checking account.

I can tolerate the value of this fund going up and down a bit in exchange for the $100 of mostly tax-free dividends it adds every month (about 2.5%-3% annualized return). It is rare I have to tap into this account, on average less than once a year in the 20 years I have had this fund. I hate the idea of having any large blob of money earning next to nothing.
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Old 08-11-2014, 05:15 AM   #5
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I've never had an 'emergency fund'. I've allocated my savings between stocks, bonds, CD's and savings accounts. Over the years, I've shifted more of my money to stocks and less to savings accounts, and this allocation lets me sleep at night and not worry about the ups and downs of the stock market.

An emergency fund may be a good way to encourage someone to start saving, but I don't think it's necessary once your savings total is in the 6 figure range. For someone who's just starting to save, I think it's important to split your savings between retirement and non-retirement savings in case you need quick access to your money without penalties.
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Old 08-11-2014, 06:28 AM   #6
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I sure wouldn't put an emergency fund into a bond fund with a 6.5 duration.
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Old 08-11-2014, 07:58 AM   #7
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I don't have an emergency fund per se, but other than the checking/savings accounts that we use to pay bills from our next most liquid account is an FDIC insured online savings account that pays 0.8%. Close enough and I suspect one could find 1% if you shop around a bit.
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Old 08-11-2014, 09:22 AM   #8
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I am never sure exactly what is meant by an emergency fund. Is that a quick $1,000 to cover some emergent need, or is that a $10,000 suddenly required home repair (roof issue or some such). In the former case I keep one month's budget as float in my checking account. In the later case, I am not aware of an emergency of that scale where I have to pay for the repair or incident immediately. Plenty of time to move funds from the investment account to checking.

All that said, I keep two month's mortgage in the checking account from which the mortgage is deducted so that is covered in case of whatever sort of mess presents itself. I keep a month's float in our spending checking and the rest of our investments are invested according to our plan. No none working cash other than the aforementioned.
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Old 08-11-2014, 01:08 PM   #9
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I keep a thousand in a checking account for small "emergencies", such as a car repair or vet bill. I moved about 15K and add money monthly to Vanguard retirement Income fund after reading the linked article. That would be used for a new roof, boiler, extensive home repair, etc. You may decide that the risk of money in a fund that holds 30% in equities is too great. I too prefer to have as much money as possible in a fund that will (hopefully) keep up with inflation or do even better.
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Old 08-14-2014, 01:51 PM   #10
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The $15k is mainly if I lost my job or got hurt and couldn't work for a while. I keep $5k liquid in a checking account for the month to month expenses. I live frugally so I could stretch the total $20k out for a year if I needed to.

So after consideration I put the $15k into the Wellington fund. I figure the stocks could offset any losses when interest rates rise. Worst case the fund loses 30% or so but in the long run I'll be fine. Thanks to frank2009 for the article I will probably beef it up 30% to cover any potential losses in a crisis.
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Old 08-14-2014, 03:00 PM   #11
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Immediate and small emergencies (bank is closed, vet, car repair etc) is not a concern for me because I have credit cards for that with at least $5k each revolving credit and they have points/rewards too. I keep about $1-2k cash at home (for armageddon, zombie attack lol), $10k liquid cash in my bank accounts, $15k in PenFed CDs paying 3%. The latter two are really to cover 6 months of job loss while the market is at the bottom and selling off equities would be the last resort.
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Old 08-14-2014, 03:39 PM   #12
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We are in the withdrawal phase and over the next couple of years (kids in college) will be spending more than usual. We've set aside some money to cover that spending in VFSUX which is a short term bond fund.
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Old 08-14-2014, 04:34 PM   #13
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This is why I'm on this site, to learn, even though I'm not retiring yet (love my job). I must be an idiot because I'm keeping a low 6 figure emergency fund in a plain jane savings account. I can remember being told to keep my emergency fund liquid. I just kept adding and one day turned around and there it was. BUT isn't the emergency fund different depending on working or non-working years. Is it different for all of us, depending on circumstance. I'm confused....must have been the fumes from the dryer sheets.
I copy and paste words of wisdom.....or tomfoolery from many of you. Thanks for all the education.
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Old 08-14-2014, 04:38 PM   #14
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Quote:
Originally Posted by splitwdw View Post
I must be an idiot because I'm keeping a low 6 figure emergency fund in a plain jane savings account.
Idiot? I doubt it. But you are definitely forgoing some long-term growth potential and allowing inflation a far bigger bite of your money than you probably should.
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Old 08-14-2014, 04:57 PM   #15
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Quote:
Originally Posted by splitwdw View Post
This is why I'm on this site, to learn, even though I'm not retiring yet (love my job). I must be an idiot because I'm keeping a low 6 figure emergency fund in a plain jane savings account. I can remember being told to keep my emergency fund liquid. I just kept adding and one day turned around and there it was. BUT isn't the emergency fund different depending on working or non-working years. Is it different for all of us, depending on circumstance. I'm confused....must have been the fumes from the dryer sheets.
I copy and paste words of wisdom.....or tomfoolery from many of you. Thanks for all the education.
It depends on your circumstances and risk tolerance. If your expenses average $10k per month then having $100k liquid isn't out of line. I usually spend $1k-1.5k per month so I'm very comfortable with $20k total. I've also been known to take time off from time to time so I wanted a years worth of expenses. Dave Ramsey recommends between 3-6 months, Orman recommends 8 months. Decide for yourself. I had never heard of having 130% of what you need in case of a market drop. It seems like pretty sound advice if you want to put your emergency fund in to market. I was always told don't put any money in the market if you need it in the next 5 years. Now I'm pretty comfortable with it.
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Old 08-14-2014, 05:27 PM   #16
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Idiot? I doubt it. But you are definitely forgoing some long-term growth potential and allowing inflation a far bigger bite of your money than you probably should.
....and I'm always worrying about my sister that has all her money in bank cd's and not making inflation levels. I should take my own advice and get most of that money into the market and working. I do have my taxable stock account and 401k aggressive market account so I'm not a stranger to the ups and downs and ride them fairly well. Maybe this would be a good time to open a Vanguard account.
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Old 08-14-2014, 10:32 PM   #17
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Hummmm...I'm like you. I have about $130K in my bank savings account. I'm sure the interest is less than 1%. Just creeped up on me. Been to busy or lazy to do anything with it. At least it's not dropping!
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Old 08-14-2014, 10:57 PM   #18
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I keep $500 in the house for super immediate needs. I usually have $1500 in checking/MMA and that's it for short term issues. I also have plenty of credit available on a few credit cards (dental emergencies, vet, etc.) For big expenses where it'll take a few days to move money around, I have a HELOC that I can write checks on or immediately transfer $5k a day thorough ACH although I don't see any reason to do that. I've had the HELOC for about a year and have yet to use it. I have very little in the way of immediately available cash otherwise.

Sent from my mobile device so please excuse grammatical errors.
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Old 08-16-2014, 03:59 PM   #19
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I don't have an emergency fund as such but my cash reserves (about 18 months of expenses) contain about 20% in the STB fund. Most of the balance is at Ally in an online account. I have never had to tap the assets in the STB fund so the dividends continue to buy more shares.
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Old 08-16-2014, 05:03 PM   #20
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I can think of many emergencies that having a credit card won't be any better than a stack of newspapers yet I don't keep cash at home.

Having almost $40k at Ally seems to be a lost opportunity in that half could go into a taxable account in equities. I learned a hard lesson about having money you'll need in less than 5 years in the stock market around 2010. I wanted to pay off my mortgage and the $40k I had in late 2007 went to $19k but managed to get about $100 higher than all my contributions ($26k) when I sold it to pay off the mortgage. Great investment.
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