"Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

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Admiral
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"Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by Admiral »

I know this has been asked before, but perhaps not quite specific to my situation.

I have about $30k as my emergency cash fund in Vanguard MM, earning nothing. When I say this is my EF, it is...but I do have other things I could draw from in a taxable account (muni bond funds, for one) plus in a true emergency TBM in my Roth.

Knowing that, what would be my best option for putting this $ in a place that is safe and also earns a bit of interest? Dealing with the Treasury Direct Website (plus the purchase limitations) seems to be a headache that is not really worth it for the extra .5% I might earn. I might be able to get 1-1.25% from my bank in a savings account. For simplicity I'd like to just keep the money at Vanguard, so that's why I was thinking the TIPS fund. Could also do 1 year CDs (also earning very little), though again this is outside of Vanguard.

We're talking about at most perhaps $600/year before taxes at 2%, which is why I have not bothered taking the money from Vanguard MM. I'm assuming we are in a slowly rising interest rate environment.

WWYD? (What would you do?)
swl
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by swl »

5yr CD with early withdrawal or high yield savings. Can't beat that with TIPS unless you take some principal risk. Or invest it in overall portfolio if you have enough assets that you could pull it out without materially changing your AA, I suppose.
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rmelvey
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by rmelvey »

I agree that Treasury direct is not worth the hassle right now. I hate that website and their security is so over the top it almost makes bonds held in that account less liquid in my eyes (I am locked out right now and have to go through a lengthy process to get it open).

I would go with TBM or the short term bond index fund. Although personally I don't like to have a separate emergency fund. I just have a total portfolio allocation that is conservative enough to match both my growth / emergency needs. This allows me to hold stocks in taxable and bonds in my 401k which saves me $$$ on taxes. When I need cash I can sell equities in taxable and change the % allocation in my 401k to keep my at my target allocation.
Last edited by rmelvey on Thu Jan 14, 2016 9:01 am, edited 1 time in total.
dbr
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by dbr »

If you can get over 1% from a savings/checking account at a bank that is what I would do.

If you have decided to build a considerable position in I bonds you could consider that to be your emergency fund, but I agree I would not go to Treasury Direct for the sole purpose of holding onto $30K.

Short term bonds including TIPS are also a reasonable option in my opinion, for an emergency fund. I prefer my bond money in intermediate funds, but you could use the ST.

At present interest rates and for that amount of money it really doesn't matter much, which is why a simple savings account makes sense.
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jhfenton
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by jhfenton »

Our emergency funds, as a practical matter:

Tier 1 - Checking (0.x%)
Tier 1b - Savings (1%)
Tier 1c - Credit Card (month-long float at 0% interest)
Tier 2 - Vanguard Limited-Term Tax Exempt (0.93% TE SEC Yield, 1.48% TE distribution yield)
Tier 3 - Vanguard Ohio Long-Term Tax Exempt (2.15% TE SEC Yield, 3.32% TE distribution yield)
Tier 4 - Equities in taxable (negative returns lately!)

Tiers 2, 3, and 4 are also part of our trackable "portfolio." As the taxable part of that grows, I'll probably add some 5-year CDs, but probably not until Tiers 1b, 2, and 3 hit six figures, and we're not quite there yet. (Our fixed income allocation is still <3% of our portfolio, but we are going to be adding to it slowly year over year.)
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goingup
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by goingup »

Admiral-
I'm in a similar position. In an effort to keep things simple, I keep the MM at Vanguard earning essentially nothing. I'm not sure moving your MM balance into TIPS would be much different than moving it into your existing muni bond fund. Why not move the balance to your muni fund?

Every year I look at my MM balance and think I should do something different, but in the end convenience, simplicity and accessibility trump earning interest. So I have no advice for you except inertia. :|
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jhfenton
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by jhfenton »

goingup wrote:Admiral-
I'm in a similar position. In an effort to keep things simple, I keep the MM at Vanguard earning essentially nothing. I'm not sure moving your MM balance into TIPS would be much different than moving it into your existing muni bond fund. Why not move the balance to your muni fund?

Every year I look at my MM balance and think I should do something different, but in the end convenience, simplicity and accessibility trump earning interest. So I have no advice for you except inertia. :|
I can't stand to keep anything in the MM earning nothing. Instead I use Vanguard Limited-Term Tax Exempt as my MM. There's a bit of risk, but I can live with it. And there's the even shorter-duration Vanguard Short-Term Tax Exempt. (They should really call Limited-Term Short-Term and call Short-Term Ultra-Short-Term.)

There are no frequent trading restrictions on Limited-Term TE or Short-Term TE, so you really can use them as a manual MM.
IPer
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by IPer »

My EF is current 2 years worth of expenses and is stored as follows:

Cash - .5-1% yield - 20%
CDs - 5 year, various yields - 35%
VWSTX - 10%
VWITX - 35%

Seems to be working fine so far, VWSTX is down pennies, VWITX is up dollars (actually 2.29%), cash and CDs are
what they are.
Read the Wiki Wiki !
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goingup
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by goingup »

jhfenton wrote:
goingup wrote:Admiral-
I'm in a similar position. In an effort to keep things simple, I keep the MM at Vanguard earning essentially nothing. I'm not sure moving your MM balance into TIPS would be much different than moving it into your existing muni bond fund. Why not move the balance to your muni fund?

Every year I look at my MM balance and think I should do something different, but in the end convenience, simplicity and accessibility trump earning interest. So I have no advice for you except inertia. :|
I can't stand to keep anything in the MM earning nothing. Instead I use Vanguard Limited-Term Tax Exempt as my MM. There's a bit of risk, but I can live with it. And there's the even shorter-duration Vanguard Short-Term Tax Exempt. (They should really call Limited-Term Short-Term and call Short-Term Ultra-Short-Term.)

There are no frequent trading restrictions on Limited-Term TE or Short-Term TE, so you really can use them as a manual MM.
Thanks, I do have the LT TE fund. The ease of being able to move $$ in/out of the MM keeps me there. No friction and no tax consequences. I did not realize there were no trade restriction on those short-term funds. Good to know!
Jack FFR1846
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by Jack FFR1846 »

I keep enough to cover expected expenses plus a few thousand in my credit union checking and money market accounts.
Extra that's part of the EF is in an Ally savings account at 1% knowing that it takes 4 days to transfer it to my CU
7 years expenses in paper iBonds. I know I can show up at the credit union with them today and they will be available to spend tomorrow. I don't do electronic iBonds.

When I have more liquid money, after being ready for next fall's tuition bill, I'll open an Ally 5 year CD. It's 2% and only 150 day interest penalty if pulled out early. Alternately, might open a Discover account for the $100 bonus with $10k deposit and pull it out after the required period.
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telemark
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by telemark »

I would not keep any money in MM when a checking account yields almost as much and has FDIC insurance. And TIPS are too volatile for an emergency fund, in my opinion. Mine is divided between an online savings account at American Express and I bonds.
Topic Author
Admiral
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Re: "Emergency Fund": MM, TIPS fund, CDs/bank acct, or IBonds

Post by Admiral »

Thanks all for these very fine suggestions.

Appx 30% of my portfolio is already in bonds (TBM primarily, in tax-adv, but smaller, taxable holdings in GNMA, and PA munis) with the latter earning an SEC yield of 2.23%. So perhaps I will just move the money there. CDs seem like more hassle for the same returns. I will take a look at the best rate my bank can give on their "high yield" (insert joke here) savings.

Thanks VERY much for the info on Treasury Direct. I am going to run screaming from that option :happy
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