Limited Term Bonds v CDs

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sanfran2015
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Joined: Mon Jan 05, 2015 9:51 pm

Limited Term Bonds v CDs

Post by sanfran2015 »

Trying to determine best location for a relatively "stable" emergency fund.

One option is
Vanguard Limited Term Tax exempt (VMLUX) which gives about 1% yield and expect more if rates go up.

Second option is
CD at a bank like Barclays

Thoughts?
AviN
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Re: Limited Term Bonds v CDs

Post by AviN »

Since Vanguard Limited Term Tax Exempt has an average duration of 2.5 years and an average stated maturity of 3.3 years, you should expect some decline in NAV if interest rates increase. The fund is a reasonable choice, but you should set your expectations right.

I'd be hesitant to use a CD for an emergency fund because of the slight possibility that the bank wont let you break the CD. The understanding I have is that this is very rare and that the bank needs to send you advance notice of a change in policy, but I'd still be hesitant.

A FDIC insured savings account yielding 1% is worth considering if you're looking to maximize safety.

Avi
Last edited by AviN on Sun May 24, 2015 8:20 pm, edited 1 time in total.
stlutz
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Re: Limited Term Bonds v CDs

Post by stlutz »

Do what's easiest. There's not enough dollar difference to worry about it a whole lot.
john94549
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Re: Limited Term Bonds v CDs

Post by john94549 »

For FDIC- or NCUA-insured savings accounts, 1% is pretty much the "going rate". That said, if you are willing to shop around, you might do a tad better. Sometimes, you'll find "limited-time" specials which might, or might not, be appealing.

http://www.depositaccounts.com/blog

This blog updates the "best deals" on garden-variety savings accounts, as well as CDs.
visualguy
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Re: Limited Term Bonds v CDs

Post by visualguy »

AviN wrote:I'd be hesitant to use a CD for an emergency fund because of the slight possibility that the bank wont let you break the CD. The understanding I have is that this is very rare and that the bank needs to send you advance notice of a change in policy, but I'd still be hesitant.
I don't think this is much of a reason to be hesitant. Assuming you also have stock market holdings, in the unlikely case where you can't break the CD, you can sell some stock from your portfolio. There's a very low combined probability of having an emergency need for money, not being able to break the CD, and having to sell stock at a bad time because of this. It's so unlikely that I wouldn't worry about it, particularly since it isn't catastrophic even if it happens.
FCM
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Re: Limited Term Bonds v CDs

Post by FCM »

Another alternative you might consider is Vanguard's new "Ultra Short Term Bond Fund" (VUBFX). Its current yield is 0.49%, and it has a duration of 1 year. I'm thinking of moving some of my Vanguard Prime Money Market emergency funds into it as opposed to a short term CD. However, if you might possibly find yourself really needing the money within the next year or two, the NAV could drop if/when short term interest rates go up. Thus, you need to be aware of that risk.
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53timr
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Re: Limited Term Bonds v CDs

Post by 53timr »

I prefer to use one of the Internet savings banks paying about 1% interest for an emergency fund. While short term bond funds would probably be OK, with my luck something would happen and I would need my emergency funds while there is some type of unforeseen dip in bond funds.
“I take my investment advice from my dentist, because he’s just as likely to lose me money as a financial advisor.” | ― Jarod Kintz, This Book Title is Invisible
AviN
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Re: Limited Term Bonds v CDs

Post by AviN »

FCM wrote:Another alternative you might consider is Vanguard's new "Ultra Short Term Bond Fund" (VUBFX). Its current yield is 0.49%, and it has a duration of 1 year. I'm thinking of moving some of my Vanguard Prime Money Market emergency funds into it as opposed to a short term CD. However, if you might possibly find yourself really needing the money within the next year or two, the NAV could drop if/when short term interest rates go up. Thus, you need to be aware of that risk.
It seems hard to justify investing in VUBFX for an emergency fund while a number of FDIC insured savings accounts have a yield of 1%.
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jainn
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Re: Limited Term Bonds v CDs

Post by jainn »

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Last edited by jainn on Tue Jan 14, 2020 3:29 pm, edited 1 time in total.
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dm200
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Re: Limited Term Bonds v CDs

Post by dm200 »

I'd be hesitant to use a CD for an emergency fund because of the slight possibility that the bank wont let you break the CD. The understanding I have is that this is very rare and that the bank needs to send you advance notice of a change in policy, but I'd still be hesitant.
Not all (perhaps not even most) of an "emergency fund" would necessarily be needed immediately. A ladder of CDs can often be safely used for part of an emergency fund that may not be needed immediately.
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Nate79
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Re: Limited Term Bonds v CDs

Post by Nate79 »

If these are 3 years of living expenses you will need to sell these periodically to live on. So I don't think a CD is an appropriate comparison but perhaps a 1% online savings account plus some in maybe a 3 year CD. I think the bond fund is superior - higher yield and very liquid.
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jainn
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Re: Limited Term Bonds v CDs

Post by jainn »

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