Vanguard Short Term Bond Fund for Emergency Fund?

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nirvines88
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Vanguard Short Term Bond Fund for Emergency Fund?

Post by nirvines88 »

Good idea? Bad idea?

I'm looking for something that yields a bit more than my bank account that also has a bit more liquidity than a CD. Based upon the historical returns (which I realize are not a predictor for future performance) this fund looks like it's yielding more than a CD too (at least the ones I've seen at my bank).

I know bonds in a taxable account are a no-no, but it still seems better to pay a bit in taxes and get better than 0.5%-1.0% in a bank account!

Any feedback would be appreciated!
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ProfessorX
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by ProfessorX »

Price and performance
Price as of 05/29/2012 $10.62
Change $0.00 0.00%
SEC yield as of 05/25/2012 0.69% A

Is the SEC yield the current monthly annualized yield? I am assuming so. I can do better than 0.69% with my FDIC insured ING direct savings account (several other savings accounts are currently even better than ING).
dbr
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by dbr »

Two points of view:

1. Short bonds are fine for emergency funds because there is little chance of much of a loss being realized if the funds actually had to be accessed.

2. Short bonds are terrible for emergency funds if the thought process is that one will actually get the miniscule increase in yield. In reality such an investment could easily lose all the difference and more if needed at the wrong time.

3. The yield benefit is non-existent anyway, as pointed out above.
livesoft
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by livesoft »

Good idea for about 1 month of expenses for your multi-tiered emergency fund. For the other tiers of your emergency fund, maybe take on more risk.
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understandingJH
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by understandingJH »

I think Limited-Term Tax Exempt would be a better alternative for an emergency fund than Short Term Bond as currently, the former is yielding more, it's dividends are tax exempt, and it's duration is a tiny bit less. Even for the the 15% bracket, its had higher tax-equivalent yield for the last 2 years. If you're in the 25% bracket, hands down, chose the tax exempt fund.

VBISX (short term)

Duration 2.7 years
SEC 0.59
Last Distribution Yield 1.54%

VBMLT (limited term tax exempt)

Duration 2.4 years
SEC 0.69
Last Distribution Yield 1.93%

Code: Select all

      1 y    2y      5y      10y
VMLTX 3.39%  3.15%   3.62%   3.22%
VBISX 2.79%  3.64%   4.53%   4.01%
That said, things could change in the future, making the short term fund more appealing for lower-tax bracket investors. When that time expectantly does eventually come around you could always shift from VMLTX to VBISX.

I know some will say to ignore the distribution yield. While it may not be a predictor of future returns, it is a good comparison in my opinion to the returns in bank accounts. If the trend is for yields to continue to go down, then likely both savings accounts and short term bond funds will be yielding less. But just as these two funds are yielding 60-100 bps above the best online savings accounts (using 0.90% as the comparison), a bit more for VMLTX after tax, I think a similar advantage would be there as time goes by as bank account interest is also dropping.

That said, I agree with the idea of tiered emergency fund. You could set something up like this:
  • 1) Online Savings Account currently earning ~ 0.90% - FDIC/NCUA insured, extremely liquid.
    2) Short-duration bond fund recently distributing 1.54-1.93% - low credit and interest rate risk, very liquid
    3) Savings bonds currently earning 2.20% - very low credit risk, no interest rate risk, money tied up for 1 year, then liquid there after
    4) Potentially Long-Term Tax-Exempt Fund recently distributing 3.81% - low credit risk, medium-high interest rate risk, very liquid
What I like about this setup is that only one of the tiers locks some money up, the bond funds can be drawn upon within 1-2 days electronically, and the overall yield (depending on the mix) could almost keep up with inflation if it hovers around 2-2.5% (the goal the federal reserve is aiming for IIRC).

This seems better to me than just leaving it in the bank, or being locked up in a CD. Especially considering for the latter, the risk of having early withdraw ability being denied (or penalties increased) when interests rates rise is possible as some here have postulated.
Last edited by understandingJH on Tue May 29, 2012 8:57 pm, edited 5 times in total.
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momar
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by momar »

Which short term bond fund? There are a few.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by nisiprius »

No harm in it that I can see. I am using it in that way to a limited extent--and Limited Term Tax Exempt in my taxable account. Not in the belief that it will do any better than a bank account, but as a risk-versus-convenience tradeoff:

a) it's a pain shifting money back and forth between my Vanguard account and my bank account in taxable.

b) it's a royal pain, no, an imperial pain, doing a custodian-to-custodian transfer between my ING Direct Roth IRA and my Vanguard Roth IRA.

c) ING Direct doesn't offer a traditional IRA, and I don't feel like opening yet another account at an Internet bank that does--if there is one, so there's no way at all to move money between my Vanguard rollover IRA and a bank account.

The risk of the short-term bond funds seems negligible to me in the context of my portfolio as a whole. The convenience outweighs the risk. Someday maybe I'll need money when the short-term bond fund is 1% or 2% down. If I even notice it, I'll be annoyed, but it won't ruin my day.

In reality I just have a melange of stuff, but I for ego-protection purposes I am willing to pretend that it is a "tiered emergency fund," like understandingJH recommends. I do have regular bank accounts, savings bonds, Total Bond, and TIPS as well.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by Toons »

"I know bonds in a taxable account are a no-no, but it still seems better to pay a bit in taxes and get better than 0.5%-1.0% in a bank account!"

Exactly
I useVFSUX(Short Term Investment grade Admiral) for that reason in my taxable account,you make more money you pay more taxes, the last 3 or so years , reinvesting the dividends along the way.So far so good :happy :happy
Last edited by Toons on Tue May 29, 2012 9:49 pm, edited 1 time in total.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by john94549 »

On-line savings accounts yielding at or about 0.8% give you the same liquidity, yield, and absence of hassle. At these low rates, return of principal trumps. Alliant Credit Union allows nice transfer from savings to checking, free checks, and no fees. I guess that's worth something. But with only a few basis points difference between VG's short-term and Alliant's savings, and all other things considered equal, it's prolly not worth the pain to shift from one to the other. I just do Alliant because it's familiar, I like the local branch manager (Mauricio), and the CSRs in Chicago are so friendly (there is something to be said for brand loyalty).
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by jegallup »

I've been using VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares) as a place to stash money I expect to spend in the next year or so. The yield is 1.73% and you can write checks on it, as well as ACHing the money back and forth with a regular bank checking account.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by livesoft »

An oft-repeated idea:

If you believe a bond fund will lose at most 10% in a year, then if you decide to use a bond fund for an emergency fund just simply increase the amount of your emergency fund by 10%. Then sleep well and peacefully at night knowing that it doesn't really matter what happens to your bond fund because you will have enough in case of an emergency.

If you do this you might even use an intermediate-term bond fund. And you will probably want to keep it in a tax-advantaged account as described in the Wiki: http://www.bogleheads.org/wiki/Placing_ ... ed_Account
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understandingJH
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by understandingJH »

Hmm. I initially avoided the idea of VFSTX due to the ~10% drop it had during part of 2008. But other than that, it looks fairly stable with the higher yield (even after tax as mentioned). Long-term though (10+ years) it's return has been almost exactly on par with VBISX.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by john94549 »

jegallup wrote:I've been using VFSUX (Vanguard Short-Term Investment-Grade Fund Admiral Shares) as a place to stash money I expect to spend in the next year or so. The yield is 1.73% and you can write checks on it, as well as ACHing the money back and forth with a regular bank checking account.
Seems to be a reasonable alternative to a short-term CD. I have $30K kicking around in VMMXX, doing nothing, so maybe I'll park that money in investor shares. In the grand scheme of things, the interest on $30K is quite paltry (even at these "nosebleed" levels, tee hee), but hey, it's beer money. $30K X 1.5% (assuming the SEC yield will fall) = $450/year X .88 (taxes from the IRA distribution) = $396 / 12 = $33/mo = just about 3 12-packs of Coors per month. I always try to bring the yield on my investments to a "what amount of more beer will it get me" level. Ideally, it would be 4 12-packs of Coors per month, but rates have fallen.

Of course, should interest rates rise and the NAV fall, I will have to harvest from elsewhere to account for the shortfall. Unless I just drink the dividends. I have been known to do that.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by momar »

If you are considering short term investment grade, maybe you would consider total bond as livesoft suggests. You would earn more and would have been better off in 2008, for example.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by john94549 »

I just sprung for those investor-class shares. It was kind of pathetic what I was getting on VMMXX. Of course, now watch rates sky-rocket. In which case I'll do OK, I guess, since I'm hedged on a short Treasury. The yearly interest on the fund is basically a rounding error, but it's a matter of principle, if not principal.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by mackstann »

I use it just because I have part of my emergency fund in my Roth and I'd rather earn miniscule interest than no interest (and I can stomach the small amount of risk). I'd also consider Total Bond Market.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by CMartel2 »

I'm a bit new to this, but I thought one of the purposes of having an emergency fund was to have it liquid.

I am not at a point where I can max out my ROTH space, but I've long thought that it would be more ideal to just buy Total Bond Market or a short-term bond fund and invest in my ROTH space as my emergency fund and just hope I didn't need to use it up to the point my income takes off when I finish residency. That said, I thought it could take several days to get money if you needed it out of a bond fund, which is why I've been going with an Ally Money Market Account at 0.84% with an available check card and checks.

Is there something I'm missing here?

I just learned you could write a check from a Vanguard bond fund, but it appears you have to be over 59.5 to do it out of your ROTH.


Hmm...
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by abuss368 »

I prefer to have the simplicity and peace of mind of cold hard cash available in a bank savings account. Yes, the rates low and hopefully some day will be better.

At the end of the day, if you really want a better yield and move to short term bonds, that would be fine too as long as you understand the risks.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by dbr »

Emergency needs can range from some amount of cash needed within minutes or hours to very large on-going expenses over months. The first is more a question of logistics than investment; the second is mainly a matter of investment and not of logistics.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by momar »

CMartel2 wrote:I'm a bit new to this, but I thought one of the purposes of having an emergency fund was to have it liquid.

I am not at a point where I can max out my ROTH space, but I've long thought that it would be more ideal to just buy Total Bond Market or a short-term bond fund and invest in my ROTH space as my emergency fund and just hope I didn't need to use it up to the point my income takes off when I finish residency. That said, I thought it could take several days to get money if you needed it out of a bond fund, which is why I've been going with an Ally Money Market Account at 0.84% with an available check card and checks.

Is there something I'm missing here?

I just learned you could write a check from a Vanguard bond fund, but it appears you have to be over 59.5 to do it out of your ROTH.


Hmm...
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by ResNullius »

We have a large chunk of our money in the short-term investment grade fund at Vanguard. It's SEC yield is 1.74%, while the distribution yield is 2.47%, and both beat the dickens out of Prime MM.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by hazlitt777 »

nirvines88 wrote:Good idea? Bad idea?

I'm looking for something that yields a bit more than my bank account that also has a bit more liquidity than a CD. Based upon the historical returns (which I realize are not a predictor for future performance) this fund looks like it's yielding more than a CD too (at least the ones I've seen at my bank).

I know bonds in a taxable account are a no-no, but it still seems better to pay a bit in taxes and get better than 0.5%-1.0% in a bank account!

Any feedback would be appreciated!
I use the short term treasury bond index fund for this purpose and have used the short term bond index in the past. I'm happy with it...it might be a little bit of a gamble, but that is all.

And as far as taxes in such a low interest rate environment, I don't give it much thought right now.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by k-slice »

I was using Total Bond Mkt. Index fund for the same purpose.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by yosef »

I had this same question, and I was looking at VCSH. The SEC Yield for it is ~1.69%.
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Re: Vanguard Short Term Bond Fund for Emergency Fund?

Post by texas_archer »

Vanguard Limited-Term Tax Exempt - What I use for Tier 1
Vanguard Interm-Term Tax Exempt - What I use for Tier 2

Im in the 33% tax bracket and live in a state with no income tax, so your situation may vary and corporate bonds may be better.
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