VMMXX vs I-Bonds vs High Yield saving account vs ... ?

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loklav
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VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 11:17 am

Hi all,

I have been saving my EF and some money that I will need in 2 years in a Barclays saving account at 1.85%. Currently around $80K.
I live in CA and I'm in the 25% tax bracket.

So I was trying to find a better place where to park this money and I would need your ideas
I looked at:
- 52 weeks T-Bills because there is no state tax, but looks like this is an auction so I don't know which rate I will get... ??
- VMMXX is around 2.05% still better than my saving account
- I-Bonds... 2.5% and no state tax, looks like a good option but I will have to sell them before 5 years (and loose the last 3 months of interest) and limited to $10k per year...
- what else?

I know that $80K is not a lot (and so the difference), but I'm going to stash more during the next 2 years...

Thanks

sillysaver
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by sillysaver » Sun Aug 12, 2018 11:20 am

I've been getting about 1.7% on 4-week T-Bills purchased through Treasury Direct auctions. That seems like a more directly comparable option than 52 weeks since you probably want high liquidity for emergency funds.

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 11:28 am

sillysaver wrote:
Sun Aug 12, 2018 11:20 am
I've been getting about 1.7% on 4-week T-Bills purchased through Treasury Direct auctions.
Why did you choose T-Bills instead of a regular saving account at 1.85% for example? And you didn't know the rate before the auction, am I correct?

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whodidntante
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by whodidntante » Sun Aug 12, 2018 11:33 am

If it's truly an "emergency fund" then you would expect not to tap it often, if at all. You are in California and if you have a nice income then your state marginal rate is high. T-bills are state tax exempt, so I would go for T-bills, taking a little term risk to buy the 52 week T-bill. Buy and roll. You can either buy them at auction or on the secondary market. Fidelity is really easy to work with and they also have the ability to auto-roll. This is their rate table:

Image

I-bonds are also state tax exempt and are fine if you prefer that. Be aware of the 1 year lockup period and the 3 month interest penalty though.

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whodidntante
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by whodidntante » Sun Aug 12, 2018 11:36 am

loklav wrote:
Sun Aug 12, 2018 11:28 am
sillysaver wrote:
Sun Aug 12, 2018 11:20 am
I've been getting about 1.7% on 4-week T-Bills purchased through Treasury Direct auctions.
Why did you choose T-Bills instead of a regular saving account at 1.85% for example? And you didn't know the rate before the auction, am I correct?
You know the estimate of the rate before the auction, which is pretty close most of the time. But it actually is an auction, so the rate is not known with certainty until the auction occurs.

TLB
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by TLB » Sun Aug 12, 2018 11:43 am

How about Vanguard Treasury Money Market Fund VUSXX 1.89

ofckrupke
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by ofckrupke » Sun Aug 12, 2018 11:59 am

You are probably in 22 or 24% federal bracket under TCJA, and 8 or 9.3% state taxation; presently, IMO, treasuries offer the best tax-adjusted return for short maturities like this, and with very low interest rate risk that is further reduced by even weak prediction of when the spend-down will come.

If you think or know the obligation will come due in about two years then I would just buy treasury notes on the secondary market that mature just before. 1.5 to 2 years is a very sweet spot on "today's" yield curve. Don't sweat the small interest rate risk for the EF part. If the bulk of it is for a house DP and you end up buying a little early, the maximum cost of today's calendar misjudgement is also very low. It's just an incredibly liquid market with incredibly low transaction costs at decent brokerage firms.

You can decide between auction and secondary market for subsequent buys when you get there. If you are at Vanguard then you will probably do better rolling 52 week bills at auction, for the small quantities involved.

mega317
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by mega317 » Sun Aug 12, 2018 12:26 pm

I would get some of this into I bonds. 10k now, EF in shorter T bills, the rest in longer T bills. In a year count that 10k towards your emergency fund, buy another 10k I bonds, and adjust your short/long T bill ratio as needed. Another year after that the whole thing will be liquid and you can decide how to pull out what you need. Plus you'll have more savings on top of it.

All of this is almost a waste of time given the amount of money and rates involved, so just have fun with it!

SpaethCo
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by SpaethCo » Sun Aug 12, 2018 1:50 pm

mega317 wrote:
Sun Aug 12, 2018 12:26 pm
All of this is almost a waste of time given the amount of money and rates involved, so just have fun with it!
This is such a great comment because it's so true. If I'm honest about how much time I've put into researching where to put my EF dollars, my ROI is downright embarrassing.

My EF was also sitting in online savings that climbed up to 1.85%.

I moved my money to a rolling set of 4-week treasuries earning > 1.9% with bills maturing every week to preserve the liquidity aspect of those dollars.

Will I make more money than the savings account? Sure, especially after the state tax savings.

If I factor in the time I spent researching how to set that up, however, I think my break-even is somewhere around the year 2050. :wink:

mega317
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by mega317 » Sun Aug 12, 2018 2:11 pm

But admit it, it's been fun for you. Can't calculate ROI on that.

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 2:22 pm

SpaethCo wrote:
Sun Aug 12, 2018 1:50 pm
mega317 wrote:
Sun Aug 12, 2018 12:26 pm
All of this is almost a waste of time given the amount of money and rates involved, so just have fun with it!
This is such a great comment because it's so true. If I'm honest about how much time I've put into researching where to put my EF dollars, my ROI is downright embarrassing.

My EF was also sitting in online savings that climbed up to 1.85%.

I moved my money to a rolling set of 4-week treasuries earning > 1.9% with bills maturing every week to preserve the liquidity aspect of those dollars.

Will I make more money than the savings account? Sure, especially after the state tax savings.

If I factor in the time I spent researching how to set that up, however, I think my break-even is somewhere around the year 2050. :wink:
Yeah I know :) I come back to this big efficiency/rentability plan every quarter... and each time I end up doing nothing....
Each time I say myself: "look 1.85% is not even the inflation, you should do something! Imagine you could find something around 2.5%... My wife look at me, says yes honey... Then after spending the week end reading bogleheads forums I get bored and end up doing noting,..."
Let see if it ends up differently this time...

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 5:03 pm

ofckrupke wrote:
Sun Aug 12, 2018 11:59 am
You are probably in 22 or 24% federal bracket under TCJA, and 8 or 9.3% state taxation; presently, IMO, treasuries offer the best tax-adjusted return for short maturities like this, and with very low interest rate risk that is further reduced by even weak prediction of when the spend-down will come.

If you think or know the obligation will come due in about two years then I would just buy treasury notes on the secondary market that mature just before. 1.5 to 2 years is a very sweet spot on "today's" yield curve. Don't sweat the small interest rate risk for the EF part. If the bulk of it is for a house DP and you end up buying a little early, the maximum cost of today's calendar misjudgement is also very low. It's just an incredibly liquid market with incredibly low transaction costs at decent brokerage firms.

You can decide between auction and secondary market for subsequent buys when you get there. If you are at Vanguard then you will probably do better rolling 52 week bills at auction, for the small quantities involved.
Yes I'm at Vanguard! Can you explain me how to proceed at what to look at?

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GoldStar
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by GoldStar » Sun Aug 12, 2018 5:15 pm

Why do you think you will have to sell iBonds in less than 5 years? If its an EF fund you hopefully will never have to sell. If you hit an emergency, 3 months interest is a small price to get you out of the emergency.

BlackcatCA
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by BlackcatCA » Sun Aug 12, 2018 5:22 pm

https://personal.vanguard.com/us/FixedIncomeHome

If you go to the treasury tab and select auction, you'll see what is available in auction this week. You will need to place your order before 10 am Monday morning.

This week, 1 yr t-bill yields about 2.4%, which gives you a tax equivalent yield of 2.6, if you are in the 8% CA income tax bracket. This meets your 2.5% return requirement you noted.

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 5:45 pm

BlackcatCA wrote:
Sun Aug 12, 2018 5:22 pm
https://personal.vanguard.com/us/FixedIncomeHome

If you go to the treasury tab and select auction, you'll see what is available in auction this week. You will need to place your order before 10 am Monday morning.

This week, 1 yr t-bill yields about 2.4%, which gives you a tax equivalent yield of 2.6, if you are in the 8% CA income tax bracket. This meets your 2.5% return requirement you noted.
Thanks!
What's the difference between buying them through Treasury direct and Vanguard. And between auction and second market?

sillysaver
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by sillysaver » Sun Aug 12, 2018 7:35 pm

loklav wrote:
Sun Aug 12, 2018 11:28 am
sillysaver wrote:
Sun Aug 12, 2018 11:20 am
I've been getting about 1.7% on 4-week T-Bills purchased through Treasury Direct auctions.
Why did you choose T-Bills instead of a regular saving account at 1.85% for example? And you didn't know the rate before the auction, am I correct?
I didn't do a lot of research. I read an article about how T-Bills were paying really high rates compared to a year ago and how the author was using them for a reserve fund. I thought it seemed pretty cool. At the time, I didn't think banks were offering very good yields on CD's and savings accounts.

One thing I was thinking is if rates get high enough, having an account with Treasury Direct will give me access to all the offerings, including Treasury notes, and maybe I'll start to build a portfolio of longer duration bonds.

ofckrupke
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by ofckrupke » Sun Aug 12, 2018 8:01 pm

loklav wrote:
Sun Aug 12, 2018 5:45 pm
What's the difference between buying them through Treasury direct and Vanguard. And between auction and second market?
At treasurydirect there is no secondary market access. So a) the treasury notes and bills under discussion are only available there at auction, and b) since they have no provision for transferring custody or intent to buy these securities back directly, you'd be holding them there until the maturity date.

At auction (via treasurydirect or elsewhere), we little people buy via noncompetitive bid. This means we don't have the take-it-or-leave-it option of a competitive bidder, but because these are dutch auctions everyone will get the high yield required to fully subscribe the offer (competitive bidders at the highest accepted yield will get only a fraction of the quantity they bid on at that yield), so we don't get stepped on. Typically that high yield will be slightly higher than available later that day on the secondary market, so if the money comes available right before an auction and you want one of the offered maturity dates then it's usually better to buy at auction.

In the secondary market you can usually find several issues within a month of any particular maturity date. If that date is 16 months in the future, some of them will be 2 year notes auctioned 8 months ago, some might be 3 or 5 or 10 year notes auctioned 20, 44, or 104 months ago, and each will have a slightly different coupon rate according to what the market bore originally at auction for the original term...and each will have an ask price that will be at a discount or premium to par, according to whether the issue's coupon rate is lower or higher than the point on the current market yield curve, for the term remaining. In the process of buying a treasury between coupon payments, you will also pay off the previous owner for interest on the period they've held it since the last coupon, and will be made whole by the next coupon payment or, if earlier, when you sell (by its new owner); your broker does the accounting/bookkeeping on that.

Vanguard's site displays ask and bid prices from the secondary market in treasuries during trading hours only. At Schwab and I think Fidelity as well, you can see stale market "quotes" after hours.

BogleMelon
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by BogleMelon » Sun Aug 12, 2018 8:23 pm

My EF is between I bonds, and VMMXX. Keep in mind that the Ibonds consists of 2 pieces, fixed rate and variable rate. You may find this helping: https://seekingalpha.com/article/416798 ... since-2009
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 9:56 pm

Ok I will give a try to the T-Bills! I'm planning to use a bond ladder. So if I understood correctly: if I want to invest 30K, I can buy 10K maturing in 3 months, 10K maturing in 6 months and 10K maturing in 1 year. Is it the right way to do it?

I was reading this article: https://www.kiplinger.com/article/inves ... ncome.html

Nobody talked about municipal bond, is it less advantageous, more risky?

Thanks all for your help!

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whodidntante
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by whodidntante » Sun Aug 12, 2018 10:04 pm

loklav wrote:
Sun Aug 12, 2018 9:56 pm
Ok I will give a try to the T-Bills! I'm planning to use a bond ladder. So if I understood correctly: if I want to invest 30K, I can buy 10K maturing in 3 months, 10K maturing in 6 months and 10K maturing in 1 year. Is it the right way to do it?

I was reading this article: https://www.kiplinger.com/article/inves ... ncome.html

Nobody talked about municipal bond, is it less advantageous, more risky?

Thanks all for your help!
Meh. A 52 week T-bill doesn't have much term risk. I would buy 52 week T-bills with the whole lot for simplicity and a higher yield. Unless you expect frequent 80 thousand dollar "emergencies," which would actually point to more interesting questions.

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Sun Aug 12, 2018 10:17 pm

whodidntante wrote:
Sun Aug 12, 2018 10:04 pm
loklav wrote:
Sun Aug 12, 2018 9:56 pm
Ok I will give a try to the T-Bills! I'm planning to use a bond ladder. So if I understood correctly: if I want to invest 30K, I can buy 10K maturing in 3 months, 10K maturing in 6 months and 10K maturing in 1 year. Is it the right way to do it?

I was reading this article: https://www.kiplinger.com/article/inves ... ncome.html

Nobody talked about municipal bond, is it less advantageous, more risky?

Thanks all for your help!
Meh. A 52 week T-bill doesn't have much term risk. I would buy 52 week T-bills with the whole lot for simplicity and a higher yield. Unless you expect frequent 80 thousand dollar "emergencies," which would actually point to more interesting questions.
One part is EF, the other part is money that I will need in 2 years, the last part is more the bond part of my AA...

The ladder allows to account for any rate increase that could happen in the coming year. Not worth it?

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whodidntante
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by whodidntante » Sun Aug 12, 2018 10:31 pm

loklav wrote:
Sun Aug 12, 2018 10:17 pm
whodidntante wrote:
Sun Aug 12, 2018 10:04 pm
loklav wrote:
Sun Aug 12, 2018 9:56 pm
Ok I will give a try to the T-Bills! I'm planning to use a bond ladder. So if I understood correctly: if I want to invest 30K, I can buy 10K maturing in 3 months, 10K maturing in 6 months and 10K maturing in 1 year. Is it the right way to do it?

I was reading this article: https://www.kiplinger.com/article/inves ... ncome.html

Nobody talked about municipal bond, is it less advantageous, more risky?

Thanks all for your help!
Meh. A 52 week T-bill doesn't have much term risk. I would buy 52 week T-bills with the whole lot for simplicity and a higher yield. Unless you expect frequent 80 thousand dollar "emergencies," which would actually point to more interesting questions.
One part is EF, the other part is money that I will need in 2 years, the last part is more the bond part of my AA...

The ladder allows to account for any rate increase that could happen in the coming year. Not worth it?
I wouldn't bother laddering with such short duration. That's just me. It might not be you. I don't mind getting unlucky and losing a bit as long as it was a good and acceptable risk. There is a risk of loss with a 52 week T-bill, but it's just not a ton of risk. If you were building out a ladder to 5 years, I might bother.

For the money you need in two years, buy a treasury note that matures just before you need the money. You should match duration with your need for liquidity.

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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by pokebowl » Mon Aug 13, 2018 5:00 am

TLB wrote:
Sun Aug 12, 2018 11:43 am
How about Vanguard Treasury Money Market Fund VUSXX 1.89
I second this, as it appears OP has enough to meet the minimum threshold. While you will achieve slightly lower yield than investing in Tbills directly, the adjusted rolling average return and state tax exemption make this MM fund an easier hold in my opinion.
There is nothing more expensive than something offered for free.

loklav
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by loklav » Mon Aug 13, 2018 10:36 am

pokebowl wrote:
Mon Aug 13, 2018 5:00 am
TLB wrote:
Sun Aug 12, 2018 11:43 am
How about Vanguard Treasury Money Market Fund VUSXX 1.89
I second this, as it appears OP has enough to meet the minimum threshold. While you will achieve slightly lower yield than investing in Tbills directly, the adjusted rolling average return and state tax exemption make this MM fund an easier hold in my opinion.
Why do you think it's easier? Because of the liquidity? Can you explain me what exactly is the adjusted rolling average return?

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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by nwffdiver » Mon Aug 13, 2018 1:58 pm

SpaethCo wrote:
Sun Aug 12, 2018 1:50 pm
mega317 wrote:
Sun Aug 12, 2018 12:26 pm

If I'm honest about how much time I've put into researching where to put my EF dollars, my ROI is downright embarrassing..

I moved my money to a rolling set of 4-week treasuries earning > 1.9% with bills maturing every week to preserve the liquidity aspect of those dollars.

Will I make more money than the savings account? Sure, especially after the state tax savings.

If I factor in the time I spent researching how to set that up, however, I think my break-even is somewhere around the year 2050. :wink:

This made me laugh, I too have recently been moving some of my EF money out of my Ally Online savings to ‘slightly’ lower my state taxes and thought all the a time I put into the rolling treasuries, probably saves me around $20 a year.

But it is fun, and safer than stock picking!!!

mega317
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by mega317 » Mon Aug 13, 2018 2:35 pm

You have me misquoted

skyghost
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Re: VMMXX vs I-Bonds vs High Yield saving account vs ... ?

Post by skyghost » Sat Oct 06, 2018 9:53 pm

I'm going through the process of deciding how to better structure my EF. Currently it is sitting in a Ally savings account but I'm debating between putting part of it in 52 week T bills or I bonds. I know about the 1 year holding restrictions so I could use cash that would otherwise go into my taxable account to fund the purchase of the I bonds. I already max my 401k, Roth IRA and HSA. Not sure if it influences the outcome but my age is 30 so not sure if it is better to consider using T bills.

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