Anyone use munis as emergency fund?

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am
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Anyone use munis as emergency fund?

Post by am »

I currently have my emergency fund at AMEX savings earning .85%. I am always tempted to use Vanguard intermed. Muni fund instead for the majority of this fund. I can tolerate a 10-15% loss since the balance plus other taxable stocks will still be enough to get my family through hard times. What keeps me from doing this is the potential for a far greater loss than this at the worst time or is this risk small enough not to worry?
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Artsdoctor
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Re: Anyone use munis as emergency fund?

Post by Artsdoctor »

Am,

Today's WSJ wrote an article on the much talked about emergency fund. There were some good points brought up and the bottom line is that different people will have different types of emergency funds: the younger you are, the more you'd probably want the old-fashioned cash and the older you are, the options might be available to you. There are disagreements. The Wiki here is also helpful and I'd take a look:

http://www.bogleheads.org/wiki/Emergency_fund

I would be reluctant to use an intermediate fund for emergency purposes but some could make an argument for going and doing it. Munis have unique tax issues with sales that you'll want to familiarize yourself with. Personally, I had used the Short-Term Muni Fund as my "emergency stash" for several years but the yield became so paltry that it just didn't make sense for me any longer.

As a rule (my rule), I would be reluctant to invest in a bond fund with an average maturity that is longer than my needs might require.
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am
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Re: Anyone use munis as emergency fund?

Post by am »

Maybe my real question is ( for which there is likely no definite answer ) what is the expected max loss for the intermed. Muni fund if you include dividend return in nominal terms? Can you lose much if you wait out the 5 year duration?
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midareff
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Re: Anyone use munis as emergency fund?

Post by midareff »

I like the Limited Term Muni for that purpose.
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Artsdoctor
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Re: Anyone use munis as emergency fund?

Post by Artsdoctor »

I could answer your question with a question. What is an emergency? In my opinion, I would like to avoid selling something to come up with funds when that asset has taken a (hopefully temporary) significant hit. During a rapid rise in interest rates, funds' volatility can be measured in terms of their duration. Do you really want to have a fund that can have a reasonable level of volatility as your emergency fund? Intermediate funds have intermediate volatility; short-term funds have lower volatility.

As you accumulate assets, you will probably have different layers of protection. You might have cash, T-bills, short-term funds, CDs which you can break, Roth assets, even HELOCs (not my favorite but some people are enamored of them).

For me, intermediate-term bond funds would not allow me to sleep well if I considered them my "emergency fund." But that's just my opinion. Emergencies will happen, and sometimes they happen during a major financial meltdown or job loss. Everyone has to figure out how much "insurance" they want/need.
Last edited by Artsdoctor on Thu Dec 05, 2013 8:22 pm, edited 1 time in total.
Sidney
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Re: Anyone use munis as emergency fund?

Post by Sidney »

Don't really have an emergency fund but do hold limited term TE and Intermediate TE in taxable.
I always wanted to be a procrastinator.
Spirit Rider
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Re: Anyone use munis as emergency fund?

Post by Spirit Rider »

I subscribe to a bucket theory of emergency funds. Those include cash, credit, I Bonds, and "munis". I have the unfortunate experience of having significantly tested those emergency funds twice in the last decade. The periods of lost income were 18 months and twelve months.

I never had to touch my golden I Bonds or the munis. However, just like your portfolio, past performance is no guarantee of future performance of your the emergency fund "portfolio".

I think it makes sense to have different layers of assets in your emergency fund. You can certainly "add" lower risk assets such as munis to your overall mix. I would not move your "entire" emergency fund from cash to munis. It is advisable to have a significant amount in principal protected assets.
stlutz
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Re: Anyone use munis as emergency fund?

Post by stlutz »

This is what I've ended up doing with my bond allocation, as having the extra accounts just for emergency savings isn't worth the trouble. So, I just say bonds are 40% + $X of my portfolio. If I have an "emergency", I would just draw on the $X portion.

I use the same mental arithmetic for other short-term savings needs as well.
Sriracha
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Re: Anyone use munis as emergency fund?

Post by Sriracha »

Spirit Rider wrote:I think it makes sense to have different layers of assets in your emergency fund. You can certainly "add" lower risk assets such as munis to your overall mix. I would not move your "entire" emergency fund from cash to munis. It is advisable to have a significant amount in principal protected assets.
This.

Though many eschew EFs as their assets grow, I continue to keep mine intact. But, I think some sort of tiered system is perfectly fine. It's a personal decision based on your particular circumstances whether an intermediate tax-exempt muni fund is appropriate for the last tier of your EF. As you can see by my signature line, I'm not big on reaching for yield, but we all have different tolerances, goals, etc. If you were to segment your EF monies into four or five parts and make the last (riskiest) quarter or fifth an investment in a high quality, low cost intermediate muni fund, I don't think too many folks could reasonably call you out on it.
Don't reach for yield.
Johm221122
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Re: Anyone use munis as emergency fund?

Post by Johm221122 »

If you have good stable value/annuity option in retirement plan look at this WIKI link(it was part of Boglehead EF link above)
http://www.bogleheads.org/wiki/Placing_ ... ed_account
I consider my whole portfolio emergency fund and would take from what made most sense at time.(cash, savings bonds, taxable, Roth,401)
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IlliniDave
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Re: Anyone use munis as emergency fund?

Post by IlliniDave »

I'm among the tiered emergency fund practitioners, and do have a small amount in VG limited-term tax exempt that I consider an add-on to my fund. In time as my taxable account grows (and my tax liability along with it), I may opt to use municipal bonds for an increasingly substantial portion of my fund.
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jdb
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Re: Anyone use munis as emergency fund?

Post by jdb »

midareff wrote:I like the Limited Term Muni for that purpose.
Agree with midareff, my cash equivalent funds are held in Vanguard Limited Term Tax Exempt. Great short duration muni fund for taxable account with immediate liquidity.
Last edited by jdb on Sat Dec 07, 2013 6:48 am, edited 1 time in total.
Buddtholomew
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Re: Anyone use munis as emergency fund?

Post by Buddtholomew »

The SEC yield for VMLTX (limited-term, tax-exempt) is 0.77% with a taxable equivalent of 1.18% for those in the 35% tax bracket. From my perspective, it wasn't worth the added risk of investing in municipal bonds when there are comparable yields available in savings accounts and CD's. We are talking about a difference of approximately $400 on a $100K investment. If your deepest EF cash is much larger, then perhaps you should consider investing in a combination of other assets.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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ogd
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Re: Anyone use munis as emergency fund?

Post by ogd »

Buddtholomew wrote:The SEC yield for VMLTX (limited-term, tax-exempt) is 0.77% with a taxable equivalent of 1.18% for those in the 35% tax bracket. From my perspective, it wasn't worth the added risk of investing in municipal bonds when there are comparable yields available in savings accounts and CD's. We are talking about a difference of approximately $400 on a $100K investment. If your deepest EF cash is much larger, then perhaps you should consider investing in a combination of other assets.
I agree with this. And there are no state specific LT TE funds, so the tax bracket can't get much higher. Take your risk with the part of the portfolio that you don't plan on selling at a moment's notice.

Long ago in the days of yore, there were Tax Exempt Money Market funds which made sense for this purpose. Not relevant anymore.
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am
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Re: Anyone use munis as emergency fund?

Post by am »

Limited term muni does not make sense for me for emergency fund since like others have said, can get a riskless yield equivalent. Intermed. Term fund starts to get tempting. I just do not have a good grasp of how risky this fund can potentially be. Are we talking about a catastrophic loss of 18% in a year with rising rates and defaults, or something like stocks with over a 50%+ loss. I could tolerate up to about 20% loss for the last tier of my emergency fund. I am talking late 2nd year of liquid reserves.
scrabbler1
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Re: Anyone use munis as emergency fund?

Post by scrabbler1 »

I use an intermediate-term muni bond fund as my first tier of emergency fund. That is, I will tap into this fund first if/when I needed cash beyond what little extra I keep in my local bank's checking account to meet larger, unforeseen expenses.
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Artsdoctor
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Re: Anyone use munis as emergency fund?

Post by Artsdoctor »

am wrote:Limited term muni does not make sense for me for emergency fund since like others have said, can get a riskless yield equivalent. Intermed. Term fund starts to get tempting. I just do not have a good grasp of how risky this fund can potentially be. Are we talking about a catastrophic loss of 18% in a year with rising rates and defaults, or something like stocks with over a 50%+ loss. I could tolerate up to about 20% loss for the last tier of my emergency fund. I am talking late 2nd year of liquid reserves.
I think your last sentence is the key one here. This is why I personally have several "lines of defense." I do have cash on hand for both immediate emergencies and to buy when something is particularly attractive. CDs to break don't work for me personally because I can only hold them in a tax-sheltered plan (taxes make them extremely unattractive in a taxable account), although I suppose you could hold them in your Roth which you could liquidate. T-bills used to make sense but they're paying nothing, and short-term bonds could be used for money you need in the next year or two. "Late second year" gives you plenty of time to start liquidating things from several accounts methodically.

In answer to your question specifically, an intermediate-term fund could easily lose 10% of its NAV if interest rates took off abruptly although your dividends will help defray some of that loss. And if you had to sell at a loss, you could additionally defray some of that loss through tax.

One day, interest rates will revert to the mean which will open up other possibilities.
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Re: Anyone use munis as emergency fund?

Post by stan1 »

A few years ago my "emergency" was a new car. It wasn't a spontaneous decision, but I didn't have $45K sitting around in a savings or money market account at the time I made my decision. I sold some municipal bond mutual fund lots which happened to have a small long term gain and a small short term loss. If you have zero tolerance for a loss don't use a muni bond fund. If you are going to treat the muni bonds as part of your bond asset allocation its a great approach that lines up well with the recent discussions on diversification of asset location for people who have taxable investment accounts. I would not recommend a muni bond fund for money that you might need to repair a car, go on an emergency trip to visit a family member, or pay some unexpected medical copays below your catastrophic limit for the year. I always keep $5-10K in cash to pay for unexpected expenses. That amount would be higher if I had kids. I use unexpected expenses as the criteria rather than months of expenses.

There is no right or wrong answer once you have a decent amount of money in taxable investment/savings accounts.
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BrandonBogle
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Re: Anyone use munis as emergency fund?

Post by BrandonBogle »

I use cash for my unexpected emergency funds (fortunate that I have a 1.99% savings account), such as car breaks down, have to buy a last-minute plane ticket for a funeral, lose my job, water line bursts, etc. I do however have "expected" emergencies in Vanguard's Long Term Munis (which are just a year or so longer than the Intermediate fund). This covers new roof, new water heater, new car, etc. -- stuff that I know someday will need to be replaced suddenly, but could happen tomorrow or 10 years from now.
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am
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Re: Anyone use munis as emergency fund?

Post by am »

Duration for int. is about 2 years longer than long term.Yield is about 1% higher. Credit quality is very similar. Does anyone know if the fund managers change duration of the fund based on conditions or has it been constant since fund inception? Is the sweet spot for munis intermed. as far as risk versus return?

Also, knowing how Vanguard is all about long term investing, buy and hold, why do they offer check writing for their int. to longer term muni funds?
stan1
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Re: Anyone use munis as emergency fund?

Post by stan1 »

am wrote:
Also, knowing how Vanguard is all about long term investing, buy and hold, why do they offer check writing for their int. to longer term muni funds?
Retirees. They might have 60-80% of their asset allocation in a bond fund. They live off the dividends and sell shares when they need a new roof or a world cruise. Checkwriting on bond funds predates the internet and customer initiated ACH transfers and is easier than wire transfers. My guess is very few people use checkwriting on bond funds these days, but perhaps there are some investors in their 70s-90s who still do. Most everyone else would sell the bond fund and ACH transfer the proceeds to a checking account.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
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am
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Re: Anyone use munis as emergency fund?

Post by am »

But if you sell the muni funds they lock you out for 2 months. Think check writing is the only way to avoid this.
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Kenkat
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Re: Anyone use munis as emergency fund?

Post by Kenkat »

Similar to others, I use a tiered approach.

I keep about 3 months in readily available cash - either in a checking account, Vanguard Prime MM or ING Direct/CapitalOne.

I have another 3 months in Vanguard Intermediate Term Tax Exempt which I could tap if things got ugly. I've had this account for 20+ years and haven't needed to touch it yet.
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Re: Anyone use munis as emergency fund?

Post by Buddtholomew »

am wrote:Limited term muni does not make sense for me for emergency fund since like others have said, can get a riskless yield equivalent. Intermed. Term fund starts to get tempting. I just do not have a good grasp of how risky this fund can potentially be. Are we talking about a catastrophic loss of 18% in a year with rising rates and defaults, or something like stocks with over a 50%+ loss. I could tolerate up to about 20% loss for the last tier of my emergency fund. I am talking late 2nd year of liquid reserves.
If 2008 is any indication of what we can expect to lose in an IT-TE fund, then I personally am not comfortable holding this investment as part of my emergency fund. Sure you can lose your job in times of prosperity, but in times of economic turmoil when employers are cutting costs, I want my funds as stable as possible. It is one less thing to worry about when you are already emotionally drained.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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am
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Re: Anyone use munis as emergency fund?

Post by am »

2008 loss of .14% for IT Muni seems tolerable for me. What I am afraid of is some risks showing up which never have in the past. Like that Schwab "low risk" bond fund that lost a ton when Lehman went down. My impression is that Vanguard uses their own credit analysts and owns so many bonds of high quality that this fund is bullet proof. Seems like the only real risk is interest rate which is reduced by increased yield.
Buddtholomew
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Re: Anyone use munis as emergency fund?

Post by Buddtholomew »

End of year losses were certainly tolerable, but the max drawdown during the year was approximately 10% if memory serves correctly. I believe max drawdown is a better barometer than the end of year return when assessing your risk tolerance.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Anyone use munis as emergency fund?

Post by scrabbler1 »

stan1 wrote:
am wrote:
Also, knowing how Vanguard is all about long term investing, buy and hold, why do they offer check writing for their int. to longer term muni funds?
Retirees. They might have 60-80% of their asset allocation in a bond fund. They live off the dividends and sell shares when they need a new roof or a world cruise. Checkwriting on bond funds predates the internet and customer initiated ACH transfers and is easier than wire transfers. My guess is very few people use checkwriting on bond funds these days, but perhaps there are some investors in their 70s-90s who still do. Most everyone else would sell the bond fund and ACH transfer the proceeds to a checking account.
One of my Fidelity muni bond funds stopped offering checkwriting to new customers back in 2004 but anyone before that time who had it for that fund could keep it. I am in that latter group so I still have it. It is handy in case I have to write a check for a large amount and don't have to go through a 2-step process to put the money into my local bank's checking account before writing a check from there.
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