Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Keep emergency cash in Vanguard's Short Term Investment Grade fund?
http://paulmerriman.com/pauls-mutual-fu ... endations/
Vanguard Emergency Fund Portfolio:
Vanguard Short Term Investment Grade-> Funds in excess of three to six months of living expenses
i have my emergency cash in a bank savings acct (1% interest).
the Short Term Investment Grade fund is double that at 2.11% yield.
im thinking of going down to 3 months expenses in the 1% acct and moving the rest of the emergency cash to the Short Term Investment Grade fund.
your thoughts?
Vanguard Emergency Fund Portfolio:
Vanguard Short Term Investment Grade-> Funds in excess of three to six months of living expenses
i have my emergency cash in a bank savings acct (1% interest).
the Short Term Investment Grade fund is double that at 2.11% yield.
im thinking of going down to 3 months expenses in the 1% acct and moving the rest of the emergency cash to the Short Term Investment Grade fund.
your thoughts?
Last edited by Gambler on Sat Feb 20, 2016 1:56 pm, edited 1 time in total.
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I keep short term monies in a high yield checking account on line.
The rest of my ,what I consider short term money is in Short Term Investment Grade,and Intermediate Term Tax Exempt..
Excellent Idea you have.
The rest of my ,what I consider short term money is in Short Term Investment Grade,and Intermediate Term Tax Exempt..
Excellent Idea you have.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I do something similar with some Cash in checking/savings and the remaining emergency / short-term needs in VBIRX. However the latter is kept in tax advantaged (https://www.bogleheads.org/wiki/Placing ... ed_account).
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Money can get from my Vanguard account to my checking account in 2 working days. For that reason, I don't see any reason to keep more than $1000 in a local savings account.
So, I think your idea is good, but that you may not be moving enough money there. And exception might be if you have no credit cards (where an emergency would probably land anyway) or if you routinely need large amounts of cash within 24 hours.
So, I think your idea is good, but that you may not be moving enough money there. And exception might be if you have no credit cards (where an emergency would probably land anyway) or if you routinely need large amounts of cash within 24 hours.
Link to Asking Portfolio Questions
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
here's a dumb question:
do the returns listed include the yield?
https://personal.vanguard.com/us/funds/ ... 0039#tab=1
1 yr return: .77%
but if the yield is 2.11%, then i'm getting 2.88% ?
do the returns listed include the yield?
https://personal.vanguard.com/us/funds/ ... 0039#tab=1
1 yr return: .77%
but if the yield is 2.11%, then i'm getting 2.88% ?
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
How to determine total return of bond fund.Gambler wrote:here's a dumb question:
do the returns listed include the yield?
https://personal.vanguard.com/us/funds/ ... 0039#tab=1
1 yr return: .77%
but if the yield is 2.11%, then i'm getting 2.88% ?
http://budgeting.thenest.com/determine- ... 27362.html
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Yes to question 1, no to question 2. Yield is included in the total return. 0.77% is the total return, and is below the yield because of loss of principal from rising interest rates on short-term credit. This is a bond fund, not a savings account. Total return can also be negative for the same reason.Gambler wrote:here's a dumb question:
do the returns listed include the yield?
https://personal.vanguard.com/us/funds/ ... 0039#tab=1
1 yr return: .77%
but if the yield is 2.11%, then i'm getting 2.88% ?
- Dale_G
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I think using the short term investment grade fund for excess emergency fund dollars is a good idea for the longer term. But you should be aware that the NAV of the fund may go up or down. If you don't mind a relatively small change in the value of the fund, you should be good to go.
I don't have an emergency fund per se, but I do have intermediate and long term munis that could serve that purpose.
Dale
I don't have an emergency fund per se, but I do have intermediate and long term munis that could serve that purpose.
Dale
Volatility is my friend
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
It's a perfectly reasonable risk to take if you're not too worried about needing money here (blue line). And since that's about a 6% drop, a sane person could say "I'm not too worried about it." Don't be alarmed by the chart, stocks were dropping 50% and if you added Total Stock to that chart you'd hardly see the little notch, but, yes, there's some extra risk there. You're hoping to get a higher return and you probably will, but with bad luck on timing, you might not. If the emergency happened just when the fund was 6% down, instead of having gotten more than in a bank account, you might end up having gotten less.
I personally wouldn't be too concerned about a 6% drop in an emergency fund because, hey, it's an emergency, but it's not like keeping it in a bank, and it's not like keeping it in a bond funds with higher credit equality. For comparison, orange is the Vanguard Short-Term Bond Index Fund, and green is the Vanguard Short-Term Treasury fund.
Source
Short Term Investment Grade is mostly a corporate bond fund, Morningstar says it has an average credit quality of BBB, and calls that "medium." Yes, that's "investment grade" but only just barely! In contrast, Short Term Bond Index has a credit quality of AA, "high." So, yes, the return of the corporate bond fund is high, but it is not magic, it is return for risk. It's not comparable to a bank account.
Also, and I don't want to spread fear, uncertainty, and doubt, but there have been concerns recently expressed about possible problems with bond funds holding less-liquid bonds, including corporates. I don't know how serious it would be with the Vanguard Short-Term Investment Grade, but I think it means yes, you could end up seeing, let's say a very annoying decline in value if you happened to need it at the wrong time.
I don't think it's a crazy thing to do but, yes, there is risk there.
I personally wouldn't be too concerned about a 6% drop in an emergency fund because, hey, it's an emergency, but it's not like keeping it in a bank, and it's not like keeping it in a bond funds with higher credit equality. For comparison, orange is the Vanguard Short-Term Bond Index Fund, and green is the Vanguard Short-Term Treasury fund.
Source
Short Term Investment Grade is mostly a corporate bond fund, Morningstar says it has an average credit quality of BBB, and calls that "medium." Yes, that's "investment grade" but only just barely! In contrast, Short Term Bond Index has a credit quality of AA, "high." So, yes, the return of the corporate bond fund is high, but it is not magic, it is return for risk. It's not comparable to a bank account.
Also, and I don't want to spread fear, uncertainty, and doubt, but there have been concerns recently expressed about possible problems with bond funds holding less-liquid bonds, including corporates. I don't know how serious it would be with the Vanguard Short-Term Investment Grade, but I think it means yes, you could end up seeing, let's say a very annoying decline in value if you happened to need it at the wrong time.
I don't think it's a crazy thing to do but, yes, there is risk there.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
How about using GNMA for this. How would one characterize the risk of GNMA vs. VFSTX since GNMA is yielding 2.62 vs 2.04 for VFSTX.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I would just use netspend 5% or other reward bank accounts that yield more than a bond fund and come with FDIC insurance. I think its one of the remaining free lunches out there for small investors.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Hwving your emergency fund in a bond fund may be a good idea as long as you understand the concept of duration & reporting capital gains/losses.
The Vanguard ST Investment Grade Bond Fund has an average duration of 2.6 years. So if short-term bond interest rates go up 1%, the net asset value of the ST Investment Grade Bond Fund will go down 2.6%. If ST interest rates go down 1%, the net asset value of the ST bond fund will go up 2.6%.
As others have said, there will be some volatility if interest rates go up or down.
Of course if you take money from your ST Investment Grade Bond Fund, that will be a taxable event. You will have to report your withdrawal & associated short/long term capital gains/losses on your Federal and state tax return if your state has a state income tax.
bill
The Vanguard ST Investment Grade Bond Fund has an average duration of 2.6 years. So if short-term bond interest rates go up 1%, the net asset value of the ST Investment Grade Bond Fund will go down 2.6%. If ST interest rates go down 1%, the net asset value of the ST bond fund will go up 2.6%.
As others have said, there will be some volatility if interest rates go up or down.
Of course if you take money from your ST Investment Grade Bond Fund, that will be a taxable event. You will have to report your withdrawal & associated short/long term capital gains/losses on your Federal and state tax return if your state has a state income tax.
bill
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Two other approaches that in my personal opinion should definitely be considered:
a) Series I savings bonds. They cannot be used for the first year. After that, like a bank account their value never goes down, and their interest rate is exactly equal to inflation.
b) This is a little trickier, but if this is "second tier" emergency money--money that you don't think is too likely to be used--you could put it into a good bank CD. The risk here, besides the penalty for early withdrawal, is the possibility that they might deny an early withdrawal--depending on what their terms and conditions say. If it's emergency money, I would be sure that the terms and conditions do not contain any language saying that early withdrawal is "at the bank's discretion" or "with the bank's permission," and if they sent a notice that the terms and conditions were changing to allow early withdrawal only with the bank's permission, I would immediately make an early withdrawal of the entire value.
a) Series I savings bonds. They cannot be used for the first year. After that, like a bank account their value never goes down, and their interest rate is exactly equal to inflation.
b) This is a little trickier, but if this is "second tier" emergency money--money that you don't think is too likely to be used--you could put it into a good bank CD. The risk here, besides the penalty for early withdrawal, is the possibility that they might deny an early withdrawal--depending on what their terms and conditions say. If it's emergency money, I would be sure that the terms and conditions do not contain any language saying that early withdrawal is "at the bank's discretion" or "with the bank's permission," and if they sent a notice that the terms and conditions were changing to allow early withdrawal only with the bank's permission, I would immediately make an early withdrawal of the entire value.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
One could simply increase their emergency fund by 6% or even 10% to take into account a potential 6% to 10% drop in the future.nisiprius wrote:It's a perfectly reasonable risk to take if you're not too worried about needing money here (blue line). And since that's about a 6% drop, a sane person could say "I'm not too worried about it."
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Such an approach is dealing with risk by adding more risk.livesoft wrote:One could simply increase their emergency fund by 6% or even 10% to take into account a potential 6% to 10% drop in the future.nisiprius wrote:It's a perfectly reasonable risk to take if you're not too worried about needing money here (blue line). And since that's about a 6% drop, a sane person could say "I'm not too worried about it."
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Or such an approach is dealing with reward by adding more reward.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
The GNMA fund, vfiix/vfijx, is a bond fund that would generally not be suitable for an emergency fund.radioheadt wrote:How about using GNMA for this. How would one characterize the risk of GNMA vs. VFSTX since GNMA is yielding 2.62 vs 2.04 for VFSTX.
An fdic-insured internet money-market account is probably the highest yielding vehicle suitable for an emergency fund right now.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I have a massive emergency fund(for me) and I'm thinking of doing this but know next to nothing about bonds or bond funds.
If I put 50K in Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX) what kind of estimate on monthly dividends could I expect at the current yield? I'm guessing just under 100.00?
Would this be taxed at regular income or capitol gains?
Would this be better re-invested or just put back in my Vanguard money market fund for overall re-investments?
If I put 50K in Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX) what kind of estimate on monthly dividends could I expect at the current yield? I'm guessing just under 100.00?
Would this be taxed at regular income or capitol gains?
Would this be better re-invested or just put back in my Vanguard money market fund for overall re-investments?
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Go to Vanguard Website.
Check monthly distribution amount of short term investment grade
Divide 50,000 by the current share price of investment grade shares.
multiply that number (number of shares) by the monthly distribution amt.
That will give you an approximate monthly dividend amt.
Check monthly distribution amount of short term investment grade
Divide 50,000 by the current share price of investment grade shares.
multiply that number (number of shares) by the monthly distribution amt.
That will give you an approximate monthly dividend amt.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
@Toons, you are a kind and generous person.
Monthly dividends are not capital gains. They are dividends though.
Monthly dividends are not capital gains. They are dividends though.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Thank you for the kind wordslivesoft wrote:@Toons, you are a kind and generous person.
Monthly dividends are not capital gains. They are dividends though.
If you noticed ,I gave him the math solution to find his approximate monthly dividend as was posted in his first question
If I put 50K in Vanguard Short-Term Investment-Grade Fund Investor Shares (VFSTX) what kind of estimate on monthly dividends could I expect at the current yield? I'm guessing just under 100.00?
I could have given him the answer as I also have a substantial amount of monies in Vfsux.
But as you know sometimes it is better to show someone how to do something.
Since neither one of us answered his second or third questions I may as well offer:
Would this be taxed at regular income or capital gains?
The monthly distributions are taxed at ordinary income rates,not capital gains,the 2 are not related (As mentioned I own the fund myself)
Would this be better re-invested or just put back in my Vanguard money market fund for overall re-investments?
Most investors on this board do not re-invest in taxable account for 2 main reasons,,tax accounting and they like to use the dividends for other purposes
Personally I reinvest.A matter of choice
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I actually did that and answered my own question so I guess I should have skipped that questionToons wrote:Go to Vanguard Website.
Check monthly distribution amount of short term investment grade
Divide 50,000 by the current share price of investment grade shares.
multiply that number (number of shares) by the monthly distribution amt.
That will give you an approximate monthly dividend amt.
Appreciate it though
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
No problem,,,glad to be of assistanceSJCX wrote:I actually did that and answered my own question so I guess I should have skipped that questionToons wrote:Go to Vanguard Website.
Check monthly distribution amount of short term investment grade
Divide 50,000 by the current share price of investment grade shares.
multiply that number (number of shares) by the monthly distribution amt.
That will give you an approximate monthly dividend amt.
Appreciate it though
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
- nisiprius
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Yes. A good way to put it.livesoft wrote:One could simply increase their emergency fund by 6% or even 10% to take into account a potential 6% to 10% drop in the future.nisiprius wrote:It's a perfectly reasonable risk to take if you're not too worried about needing money here (blue line). And since that's about a 6% drop, a sane person could say "I'm not too worried about it."
Since there's no way to decide how big an emergency fund needs to be other than a really wild guess, one could also shrug and say that you can't size the fund accurately to ±10% anyway.
I'm sympathetic to the idea of a multi-tiered "emergency reserve" because there is obviously some number of dollars that you "really might need" and another further amount that you "could need but probably won't" and ±10% fluctuation in that second layer doesn't seem dangerous. On the other hand it could be highly consequential if a financial emergency occurred around the end of 2008 and you had to meet it by selling stocks worth half what you paid for them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
If you have some unused Roth IRA space, you can start filling it up with your emergency funds. Contributions can be withdrawn anytime without penalty and will grow tax-free in the meantime in whatever investment vehicle you choose. The only thing to check would be how long it takes to withdraw contributions if an emergency arises and if your credit cards will let you live through that period. Having 3 months of expenses in a bank account and the rest in a Roth IRA would probably work just fine for most situations.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I don't think it's a good idea.
Here's why: these bonds compete in the same open bond market as Treasury bills currently yielding 0.3%. The latter have the safety and liquidity that we expect from emergency cash. If bond investors believed that STIG-bonds offered something almost as good, they would bid up the former and bid down the latter, and the yields would be much closer. Clearly, bond investors think STIG is much more risky, and they know better than you in the aggregate.
Instead, what you have is a 1% completely safe, completely liquid account that institutional bond investors can only dream of , since it's only available with FDIC guarantees to small investors. You have a 0.7% advantage over market instruments, a free lunch of sorts. Free lunches are rare, so one should take them.
Here's why: these bonds compete in the same open bond market as Treasury bills currently yielding 0.3%. The latter have the safety and liquidity that we expect from emergency cash. If bond investors believed that STIG-bonds offered something almost as good, they would bid up the former and bid down the latter, and the yields would be much closer. Clearly, bond investors think STIG is much more risky, and they know better than you in the aggregate.
Instead, what you have is a 1% completely safe, completely liquid account that institutional bond investors can only dream of , since it's only available with FDIC guarantees to small investors. You have a 0.7% advantage over market instruments, a free lunch of sorts. Free lunches are rare, so one should take them.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
One more question.....
Assuming something happened and you had to cash in the entire bond fund what would be the tax consequences from a taxable account?
I can take 50K from a money market account tax free, what about a bond fund?
Assuming something happened and you had to cash in the entire bond fund what would be the tax consequences from a taxable account?
I can take 50K from a money market account tax free, what about a bond fund?
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
You pay tax on a gain, or can take a tax credit for a loss.SJCX wrote:One more question.....
Assuming something happened and you had to cash in the entire bond fund what would be the tax consequences from a taxable account?
I can take 50K from a money market account tax free, what about a bond fund?
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
Long or short term gains or losses need to be reported on income tax returnSJCX wrote:One more question.....
Assuming something happened and you had to cash in the entire bond fund what would be the tax consequences from a taxable account?
I can take 50K from a money market account tax free, what about a bond fund?
http://www.fool.com/personal-finance/ta ... funds.aspx
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I don't think it is worth it.
Admiral class -
The one year yield is 1.13%
The three year yield is 1.36%
Duration is 2.6%
So, if interest rates go up (a distinct possibility) your return may well drop below 1%.
Admiral class -
The one year yield is 1.13%
The three year yield is 1.36%
Duration is 2.6%
So, if interest rates go up (a distinct possibility) your return may well drop below 1%.
Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?
I use short term TIPS fund for this purpose. Expense ratio a bit lower then investment grade fund and it's what vanguard uses in their near term target date funds.