Keep emergency cash in Vanguard's Short Term Investment Grade fund?

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Gambler
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Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Gambler »

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?
Last edited by Gambler on Sat Feb 20, 2016 1:56 pm, edited 1 time in total.
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livesoft
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade?

Post by livesoft »

Excellent idea.
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Toons
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

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.

:happy
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fnmix
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by fnmix »

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).
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by retiredjg »

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Gambler »

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% ?
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Toons
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

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% ?
How to determine total return of bond fund. :happy

http://budgeting.thenest.com/determine- ... 27362.html
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Northern Flicker »

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% ?
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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Dale_G »

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.

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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by nisiprius »

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

Image

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by radioheadt »

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by mikep »

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?

Post by billfromct »

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.

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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by nisiprius »

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by livesoft »

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."
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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by jginseattle »

livesoft wrote:
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."
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.
Such an approach is dealing with risk by adding more risk.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by livesoft »

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?

Post by Northern Flicker »

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.
The GNMA fund, vfiix/vfijx, is a bond fund that would generally not be suitable for an emergency fund.

An fdic-insured internet money-market account is probably the highest yielding vehicle suitable for an emergency fund right now.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by SJCX »

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?
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

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. :happy
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by livesoft »

@Toons, you are a kind and generous person.

Monthly dividends are not capital gains. They are dividends though.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

livesoft wrote:@Toons, you are a kind and generous person.

Monthly dividends are not capital gains. They are dividends though.
Thank you for the kind words :happy :happy
If you noticed ,I gave him the math solution to find his approximate monthly dividend as was posted in his first question :happy
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 :happy
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by SJCX »

Toons 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. :happy
I actually did that and answered my own question so I guess I should have skipped that question

Appreciate it though
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

SJCX wrote:
Toons 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. :happy
I actually did that and answered my own question so I guess I should have skipped that question

Appreciate it though
No problem,,,glad to be of assistance :sharebeer
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by nisiprius »

livesoft wrote:
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."
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.
Yes. A good way to put 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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by sk.dolcevita »

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by ogd »

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.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by SJCX »

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?
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by tibbitts »

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?
You pay tax on a gain, or can take a tax credit for a loss.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Toons »

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?
Long or short term gains or losses need to be reported on income tax return :happy

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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by Leif »

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%.
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Re: Keep emergency cash in Vanguard's Short Term Investment Grade fund?

Post by talltodd »

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.
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