Which Bond Fund As Emergency Fund?

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Lieutenant.Columbo
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Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Sun Oct 02, 2016 10:06 am

Assume that:
1. you are still in the accumulating phase, say, 10 years from retiring at age 56
2. your current allocation is 75% stock funds, 15% liquid cash, 10% bonds funds
3. one year in household expenses equals 7% of current stocks+cash+bonds total
4. out of your stocks+cash+bonds: 20% is Tax Advantaged, 80% Taxable
5. you decide to move your one-year-in-household-expenses Emergency Fund (7% of total) from cash to a (Vanguard?) Bond Fund.

Which one would that bond fund be? And Why?
If you think this is a no-no, please explain why.

Thank you very much for your input.
Last edited by Lieutenant.Columbo on Mon Oct 03, 2016 7:40 pm, edited 1 time in total.
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Re: Which Bond Fund As Emergency Fund?

Post by Stormbringer » Sun Oct 02, 2016 10:27 am

I-Bonds make a good emergency fund because they are inflation protected and have no principal risk. You just need to hang on to them for a year before you can redeem them.
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Re: Which Bond Fund As Emergency Fund?

Post by oldzey » Sun Oct 02, 2016 10:42 am

I use VWITX (Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares) as the second tier to my emergency fund (a high-yield savings account is my first tier).
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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Sun Oct 02, 2016 10:47 am

oldzey wrote:I use VWITX (Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares) as the second tier to my emergency fund (a high-yield savings account is my first tier).
thank you very much for your input
would you mind explaining how/why you picked VWITX?
and how many years in expenses each of your EF (edit to add: tier) hold?
also, do you hold other bond funds that you do not consider part of your Emergency Fund?
thank you very much!
Last edited by Lieutenant.Columbo on Mon Oct 03, 2016 6:25 am, edited 2 times in total.
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Re: Which Bond Fund As Emergency Fund?

Post by Intrepyd » Sun Oct 02, 2016 10:48 am

Decide what your maximum tolerable loss will be for your E-fund. That will help determine how risky you can be with it. If you have a sufficiently large taxable account, the utility of holding a slice specifically as an E-fund might be less compelling, since no matter how risky your allocation, it is unlikely to fall below your prescribed E-fund floor value.

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Re: Which Bond Fund As Emergency Fund?

Post by nisiprius » Sun Oct 02, 2016 10:50 am

Vanguard puts each of its funds in one of five broad, rough "risk potential" categories. They show the category for each fund on their summary page for the fund, such as this page for Vanguard Short-Term Bond Index Fund:

Image

Vanguard says this--I've underlined portions:
Conservative funds--Risk level one
Vanguard funds are classified as conservative if their share prices are expected to remain stable or to fluctuate only slightly. Such funds may be appropriate for the short-term reserves portion of a long-term investment portfolio, or for investors with short-term investment horizons (three years or less).

Conservative to moderate funds—Risk level two
Vanguard funds classified as conservative to moderate are subject to low-to-moderate fluctuations in share prices. In general, such funds may be appropriate for investors with medium-term investment horizons (four to ten years).
Because of this, I would only consider funds in "risk potential category 1" for an emergency fund.

Using Vanguard's interactive fund list and applying filters for "bonds" and "risk level 1," there are ten such funds. However, three of them have a little symbol next to them, meaning they are on Vanguard's list of "select" funds, which they describe as "well-established, broadly diversified, low-cost funds selected by our Portfolio Review Department." Vanguard strongly hints that you should consider these funds first.

Image

So, going only by Vanguard's presentation, I would first consider one of these three funds:

Vanguard Short-Term Inflation Protected Securities Index, VTAPX
Vanguard Short-Term Investment-Grade, VFSTX
Vanguard Short-Term Tax-Exempt, VWSTX

Short-Term Tax-Exempt would only make sense a) in a taxable account, and probably only if b) you were in a high tax bracket.

But, seriously, are you sure you don't just want a bank account?
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Re: Which Bond Fund As Emergency Fund?

Post by Munir » Sun Oct 02, 2016 10:58 am

For me, an emergency fund cannot be a bond fund because of potential loss of principal. Assuming your emergency funds are taxable, what's wrong with an online savings account with 1% return? But, (there's always a but), if the emergency fund is quite large, you can have both a short term bond fund as outlined above by nisiprius and an online savings account.

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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Sun Oct 02, 2016 11:01 am

nisiprius wrote:But, seriously, are you sure you don't just want a bank account?
nisiprius,

thank you very much your guided thought-process towards the selection of a bond fund as emergency fund; it is great actually!

As to your final question:
I was trying to get some yield from the $80K Emergency Fund by investing in Bonds rather than sitting it in a bank account. Investing and holding in a Vanguard Bond fund seems pretty simple, so why no?t, I thought.

So, let me ask you: why would you have $80K sitting permanently in a bank account? :wink: (no criticism implied nor a rhetorical question)
Last edited by Lieutenant.Columbo on Sun Oct 02, 2016 11:25 am, edited 1 time in total.
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Re: Which Bond Fund As Emergency Fund?

Post by jjface » Sun Oct 02, 2016 11:06 am

Some people would suggest that you do not need a separate emergency fund - you have a lot of taxable assets and a decent amount in bonds and liquid funds. You could just add the $80k to your main allocation. In an emergency you'd be able to tap many years of liquid cash and bonds whilst leaving risky assets like stocks alone.

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Re: Which Bond Fund As Emergency Fund?

Post by gundlached » Sun Oct 02, 2016 11:11 am

Call me old fashioned, but Emergency Fund is bank account, CD, or Ibonds.

Anything else is being conservative with your fixed income, not "emergency fund".

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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Sun Oct 02, 2016 11:23 am

jjface wrote:Some people would suggest that you do not need a separate emergency fund - you have a lot of taxable assets and a decent amount in bonds and liquid funds. You could just add the $80k to your main allocation. In an emergency you'd be able to tap many years of liquid cash and bonds whilst leaving risky assets like stocks alone.
thank you for your reply
When you said "add the $80k to your main allocation", did you mean by "add the $80k to your main BOND allocation"?"
Last edited by Lieutenant.Columbo on Mon Oct 03, 2016 7:45 am, edited 1 time in total.
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Re: Which Bond Fund As Emergency Fund?

Post by stlutz » Sun Oct 02, 2016 11:31 am

what do you mean by "add the $80k to your main allocation"?
Suppose you have 40% of your portfolio in Vanguard Total Bond Fund. Instead of having a separate E-fund holding in something else, just have 40% + the $80K in Vanguard total bond.

Yes, there is more risk that total bond will go down than there is in, say, a bank account. But how large an E-fund should be is such a guess anyhow... If one is trying to reduce the number of accounts they have, getting rid of the separate E-fund account is a great place to start.

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Re: Which Bond Fund As Emergency Fund?

Post by Dave55 » Sun Oct 02, 2016 12:23 pm

Ditto on the bank account (either checking or low yield saving) for emergency fund.
Dave

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Re: Which Bond Fund As Emergency Fund?

Post by oldzey » Sun Oct 02, 2016 12:23 pm

Lieutenant.Columbo wrote:
oldzey wrote:I use VWITX (Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares) as the second tier to my emergency fund (a high-yield savings account is my first tier).
thank you very much for your input
would you mind explaining how/why you picked VWITX?
Since it's my second tier EF (which I've never used), I don't mind taking a little more risk than a short-term fund.
and how many years in expenses each of your EF hold?
I hold 6 months of expenses in VWITX and 1-3 months in 2 high-yield savings accounts. I also use credit cards (with cashback rewards) if I run low on cash (in checking account) towards the end of the month. I've never paid a penny in credit card interest in the 17 years I've used them.
also, do you hold other bond funds that you do not consider part of your Emergency Fund?
Yes, TIAA Traditional in my 403b is my only other fixed income asset.
thank you very much!
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Re: Which Bond Fund As Emergency Fund?

Post by nisiprius » Sun Oct 02, 2016 1:33 pm

Lieutenant.Columbo wrote:So, let me ask you: why would you have $80K sitting permanently in a bank account? :wink: (no criticism implied nor a rhetorical question)
Bank accounts don't get enough respect. Watch out for self-interest on the part of investment companies and advisors, who can't make money when you put your money in the bank, and failure to define the meaning of the word "cash." True cash, folding paper currency under the proverbial mattress, fixed number of dollars is a bad idea because it really does get eroded by inflation.

But what most people mean by cash--a bank account--is another matter. It doesn't just "sit there," it earns some interest. It's hard to make a definitive statement because it depends on where and when and how clever you are about shopping, but bank accounts are not that different from Treasury bills, and Treasury bills have historically kept slightly ahead of inflation--not at all times, though.

At the moment, you can find online savings accounts that pay 1%, no fluctuation at all, no early withdrawal issues, daily liquidity, FDIC insurance, and no interest rate risk.

Image

Meanwhile, yeah, the "Vanguard short-term investment-grade bond fund," which I picked because it was one of the three that popped up in my search and I think it probably has the highest return of the three, has a current yield of 1.55%, but has obvious short-term fluctuations and look at the nasty notch during 2008-2009:

Image

They're not big fluctuations and that nasty notch isn't very deep. A sane person absolutely could take that risk in their emergency fund. On the other hand, $80,000 a year in the bank racking up $800/year in interest doesn't sound too bad--particularly since a rising interest rate would do nothing but good.
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Re: Which Bond Fund As Emergency Fund?

Post by Kevin M » Sun Oct 02, 2016 4:20 pm

Lieutenant.Columbo wrote: So, let me ask you: why would you have $80K sitting permanently in a bank account? :wink: (no criticism implied nor a rhetorical question)
I don't know about "permanently", but currently you can easily earn about 1% in an FDIC-insured bank account, while the 3-year Treasury yield is lower at about 0.9%, and even the 5-year Treasury yield is only 1.14%. So in the simple bank account, you earn almost as much guaranteed yield is with the 5-year Treasury, but with no term risk (neither has any significant credit risk).

So for the retail investor, FDIC/NCUA-insured deposit accounts are a pretty sweet deal on a risk-adjusted basis.

You'll get higher yield by taking some credit risk in corporate or muni bonds, but of course the risk could show up just when you need to tap the EF, as was the case for many people in late 2008.

In a taxable account, you might consider something like Limited-Term Tax-Exempt, with a tax-exempt yield, 1.09% for Admiral shares (VMLUX), that is a bit higher than the savings account. In the 25% federal tax bracket this is a taxable equivalent yield of 1.45%. Maximum drawdown in 2008 was only -1.56% in September 2008. There have been eight drawdowns of more than -1% (most recent in 2013) and 14 drawdowns of more than -0.5% (most recent in 2015) since 2001. So the risk has shown up a bit at times, but it has never been too bad, so up to you if the generally higher taxable-equivalent yield is worth the risk.

You can look at investor shares, VMLTX, to see history as far back as September 1987. Worst drawdown was -1.79% in March 1994. Backtest Portfolio Asset Allocation.

I was going to say that we haven't seen a sustained, multi-year increase in yields since 1987, but looking at the 2-year Treasury yield, that's not quite true. The 2-year yield increased from 1.33% at the end of May 2003 to 5.16% at the end of June 2006: https://fred.stlouisfed.org/graph/?g=7wbH. During this 3-year period of rising short-term yields, VMLTX had an annualized average return of 1.35% with a maximum drawdown of -1.62%. Backtest Portfolio Asset Allocation. Not bad.

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Re: Which Bond Fund As Emergency Fund?

Post by Kevin M » Sun Oct 02, 2016 4:42 pm

Kevin M wrote: I was going to say that we haven't seen a sustained, multi-year increase in yields since 1987, but looking at the 2-year Treasury yield, that's not quite true. The 2-year yield increased from 1.33% at the end of May 2003 to 5.16% at the end of June 2006: https://fred.stlouisfed.org/graph/?g=7wbH. During this 3-year period of rising short-term yields, VMLTX had an annualized average return of 1.35% with a maximum drawdown of -1.62%. Backtest Portfolio Asset Allocation. Not bad.
Looking at this a little more closely, we can see at the Vanguard site that the capital return for VMLTX was negative in 2003, 2004, and 2005, and 0% in 2006, as we'd expect with rising rates. Vanguard - Limited-Term Tax-Exempt Fund Investor Shares - Historical Returns. So it was the annual income return of about 3% during these years that enabled the fund to end up with positive total returns in these years.

Things are different now than they were then. The most recently published distribution yield for VMLTX is 1.45%, so that's about the income return you can expect for the next year or so (distribution yield of this fund changes very slowly; income return was 1.51% in 2015). So with a capital return of -1.92%, as occurred in 2005, you would not have enough income return to generate a positive total return as in 2005 (income return = 3.03%, total return = 1.11%). Still not horrible, but you could see some small annual losses in the fund if rates were to increase much from current levels. Of course that would be good for the longer term, but not optimal if you had to tap your EF at an inopportune time.

Also remember that the income return is federally tax-free, and long-term capital return is taxed at favorable capital gain tax rates (and capital losses could be harvested), so the after-tax numbers are even better than the raw numbers on a relative basis.

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Re: Which Bond Fund As Emergency Fund?

Post by Index Fan » Sun Oct 02, 2016 7:13 pm

I used to use the VG Short Term Bond Index as an emergency fund. TBM is probably more suitable now if you don't mind a bit of risk.
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Re: Which Bond Fund As Emergency Fund?

Post by rambojani » Sun Oct 02, 2016 9:45 pm

which bank are you using for emergency funds. like do they give a debit card?

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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Sun Oct 02, 2016 9:48 pm

rambojani wrote:which bank are you using for emergency funds. like do they give a debit card?
Suntrust Bank (unless I am persuaded to move funds to a different institution).
And, yes they do have debit cards (which I never use bc we use our non-Suntrust credit card due to higher rewards).
Why did you ask?
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Re: Which Bond Fund As Emergency Fund?

Post by SeeMoe » Mon Oct 03, 2016 9:08 am

Emergency fund or " big ticket" fund for unexpected events is what I call my "go to "fund when in need. Otherwise I dip into my short term checking or money market accounts. I also have the Limited Term tax exempt bond fund in my taxaxable account for big ticket/emergencies. Or the short term corporate bond fund would be okay too...

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Re: Which Bond Fund As Emergency Fund?

Post by feh » Mon Oct 03, 2016 11:42 am

Personally, I wouldn't put my E fund in a bond fund.

But, if you're going to anyway, I would suggest VFSUX.

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Re: Which Bond Fund As Emergency Fund?

Post by pascalwager » Mon Oct 03, 2016 12:49 pm

For me, HY savings are the "new bonds". Why take interest rate risk for such low bond yields nowadays, when you can get similar interest (1.05%) in an online savings account?

So, most of my "bonds" and all emergency money is mixed together in the same online savings account up to the FDIC limit.

I do have short-term Treasury fund shares in an IRA which I may increase if yields begin to rise.
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Re: Which Bond Fund As Emergency Fund?

Post by Phineas J. Whoopee » Mon Oct 03, 2016 4:29 pm

OP: for a completely different perspective you may wish to read this wiki article: Placing cash needs in a tax-advantaged account.

Its suggestion can be generalized to taking more term and credit risk with your emergency reserve, if you put extra in such that even if you need the money in a bad downturn for those instruments, it still will be sufficient. That concept works with or without using the tax-management method described in the linked article.

To invent an example, if I would be comfortable with $10,000 in an FDIC-insured savings account, I might be comfortable with, say, $12,000 in an intermediate-term tax exempt fund, or $25,000 in a total stock market fund.

Where did I get those numbers? I made them up to illustrate the point.

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Re: Which Bond Fund As Emergency Fund?

Post by dratkinson » Mon Oct 03, 2016 7:16 pm

I keep a year of living expenses liquid in checking/savings/mmkt. But the largest tier of my formal EF is VWIUX (IT national muni). Why?
--I prefer tax-exempt dividends to taxable dividends.
--It has an acceptable taxable-equivalent yield in the 25% fed tax bracket... better in higher tax brackets.
--It's exempt from the IRS 6-mo holding period requirement to protect tax-exempt dividends. Meaning shares can be easily redeemed.
--It performs multiple duties as: portion of my bond allocation, largest tier of my formal EF, new car fund, and dry powder.
--No annual purchase limit.
--I can withstands its ~50-cents/yr price spread.

For a while I used savings bonds as a tier of my EFs, but abandoned the effort. Why?
--The annual contribution limit meant larger investments had to go someplace else.
--The savings bond state-tax advantage is worth less than the muni fed-tax advantage. (Advantage: munis.)
--It can sometimes be a pain to redeem paper savings bonds. (But playing the paper saving bond tax refund game was fun.)
--It simplified my investments to send all proceeds to munis. (The "someplace else" used when savings bond contribution limit exceeded.)



I notice you are 56 and 10% bonds. Most forum member would recommend that it's time to begin increasing your AA toward ~50/50. Can do this tax-efficiently over the coming years by sending all new money to bonds.
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Re: Which Bond Fund As Emergency Fund?

Post by Inframan4712 » Mon Oct 03, 2016 7:36 pm

I use VWITX instead of a bank account for my 2nd tier. 1st tier is one month of expenses in my checking account. 3rd tier is credit cards. 4th tier is a 529.

I avoid bank accounts because I've used them in the past, and been burned when the attractive rate is suddenly cut to nothing after a few months. This has happened to me 4 times so I gave up. Not worth it to me to go to the hassle of setting up new accounts and transferring money.

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Re: Which Bond Fund As Emergency Fund?

Post by gclancer » Mon Oct 03, 2016 7:40 pm

Stormbringer wrote:I-Bonds make a good emergency fund because they are inflation protected and have no principal risk. You just need to hang on to them for a year before you can redeem them.
+1 for folks that value having a literal pot of money for emergencies, I don't think there's any better vehicle than I Bonds.

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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Mon Oct 03, 2016 7:43 pm

dratkinson wrote:I keep a year of living expenses liquid in checking/savings/mmkt. But the largest tier of my formal EF is VWIUX (IT national muni). Why?
--I prefer tax-exempt dividends to taxable dividends.
--It has an acceptable taxable-equivalent yield in the 25% fed tax bracket... better in higher tax brackets.
--It's exempt from the IRS 6-mo holding period requirement to protect tax-exempt dividends. Meaning shares can be easily redeemed.
--It performs multiple duties as: portion of my bond allocation, largest tier of my formal EF, new car fund, and dry powder.
--No annual purchase limit.
--I can withstands its ~50-cents/yr price spread.

For a while I used savings bonds as a tier of my EFs, but abandoned the effort. Why?
--The annual contribution limit meant larger investments had to go someplace else.
--The savings bond state-tax advantage is worth less than the muni fed-tax advantage. (Advantage: munis.)
--It can sometimes be a pain to redeem paper savings bonds. (But playing the paper saving bond tax refund game was fun.)
--It simplified my investments to send all proceeds to munis. (The "someplace else" used when savings bond contribution limit exceeded.)

I notice you are 56 and 10% bonds. Most forum member would recommend that it's time to begin increasing your AA toward ~50/50. Can do this tax-efficiently over the coming years by sending all new money to bonds.
dratkinson,
Thank you for your input.
I am not 56, but 46. I guess that is what I poorly meant when I said "10 years from retiring at age 56" (I am 46 and plan to retire at 56).
I'd like to ask you how you plan to handle your EF tiers differently from what you explained above once retired (or how you used to handle your EF tiers differently when you were still active).
Thank you!
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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Mon Oct 03, 2016 7:59 pm

Phineas J. Whoopee wrote:...Placing cash needs in a tax-advantaged account.

Its suggestion can be generalized to taking more term and credit risk with your emergency reserve, if you put extra in such that even if you need the money in a bad downturn for those instruments, it still will be sufficient. That concept works with or without using the tax-management method described in the linked article.

To invent an example, if I would be comfortable with $10,000 in an FDIC-insured savings account, I might be comfortable with, say, $12,000 in an intermediate-term tax exempt fund, or $25,000 in a total stock market fund...
Hi Phineas,
So, I take it that "if you put extra in such that even if you need the money in a bad downturn for those instruments, it still will be sufficient" means that this concept works both in Taxable and Tax Advantaged accounts.
Thank you very much!
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Re: Which Bond Fund As Emergency Fund?

Post by Dandy » Mon Oct 03, 2016 9:52 pm

Keep the emergency fund in a FDIC insured product and/or a Treasury Fund. I think E funds are about safety not yield or risk.

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Re: Which Bond Fund As Emergency Fund?

Post by patrick » Mon Oct 03, 2016 10:25 pm

The risk of the short-term bond fund is minimal (in nominal terms ... there is still inflation risk) but it doesn't seem to have much reward either. The SEC yield of 1.06% quote above is actually slightly less than the yield on the best insured deposit accounts (which also have plenty inflation risk) -- see https://www.depositaccounts.com/ for lists that include better ones. If you want bonds that yield more than the best deposit accounts can give, you'll need to go longer terms or lower credit quality, and thus more risk.

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Re: Which Bond Fund As Emergency Fund?

Post by dratkinson » Tue Oct 04, 2016 4:28 am

Lieutenant.Columbo wrote:
dratkinson wrote:...VWIUX (IT national muni).
--It performs multiple duties as: portion of my bond allocation, largest tier of my formal EF, new car fund, and dry powder.
...
dratkinson,

I'd like to ask you how you plan to handle your EF tiers differently from what you explained above once retired (or how you used to handle your EF tiers differently when you were still active).
Note. I do keep ~1-yr of liquid livings expense in checking/savings/mmkt. I feel a small liquid cushion is helpful to smooth out the bumps. My then investing the excess in munis with a higher taxable-equivalent yield (TEY) scratches the itch to reach for additional yield without the need to churn CCs/accounts to chase rates. Think: simplicity.


There is no difference in handling munis as an EF, before or after retirement, once you feel you have enough to use all of your investments as your EF. If you no longer worry too much about price fluctuations, then you probably have "enough".


Before, when I felt I needed to be using insured-principle discrete EF components (savings and CDs and EE savings bonds and I savings bonds and playing the paper savings bond tax refund game, and opening new CC accounts for the bonus,...), it was much more work to track/manage each. And I followed the forum's advice to not count my EF as part of my AA.

But now, I don't worry about it as I follow the "all my investments are my EF" concept. Why? Because I began to feel that I had "enough" so didn't need to worry as much about price fluctuations. Instead I now preferred to simplify my CCs, investments, and EF tiers before the onset of mental decline. And since some (LT and single-state) munis have a better TEY than savings/CDs/savings bond and are easy to sell, I decided to roll all my discrete EF components into munis and reap the dual benefits of both higher TEYs and simplicity.

Now all of my muni funds (IT, LT, single-state) make up my bond allocation in taxable. VWIUX, as my smallest holding, has less effect on my AA, so it's tagged to be the last tier of my formal EF (behind the year of expenses in checking/savings/mmkt).

For simplicity, if no emergency happens, it's counted as a portion of my bond allocation. And if an emergency happens, or I decide to buy a new vehicle, I will sell VWIUX first. Why? Because it has a lower TEY than my LT and single-state munis. I've just been putting off doing anything with it to delay paying the state tax on capital gains.


Suggestion.
--Keep 6-12 months of living expenses liquid to smooth out the bumps. You can put the remainder of your EF in higher TEY munis.
--Decide if you have "enough" to withstand some price fluctuations. (You asked about using bonds as an EF so guessing you can.)
--Learn to compute muni TEY = SEC yield / (1 - fed tax bracket).
--Compute the TEYs of your candidate munis and compare them to taxable alternatives (CDs, taxable bonds, savings bonds,...).
--Can avoid high-yield munis as they contain an allocation to AMT issues. (Read the prospectus.)

For more on munis, see my three posts starting here: viewtopic.php?p=2787993#p2787993

Get your SEC yield information from Vanguard as it's correct.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Munir
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Re: Which Bond Fund As Emergency Fund?

Post by Munir » Tue Oct 04, 2016 3:55 pm

Lieutenant.Columbo,

Multiple respondents have suggested online savings accounts yielding slightly over 1% for your emergency fund but I don't recall you stating your opinion about such accounts. Do you have reservations about this option?

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Lieutenant.Columbo
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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Tue Oct 04, 2016 4:19 pm

Munir wrote:Lieutenant.Columbo,

Multiple respondents have suggested online savings accounts yielding slightly over 1% for your emergency fund but I don't recall you stating your opinion about such accounts. Do you have reservations about this option?
Hi Munir,

My only reservations about savings accounts yielding 1% is that I get the feeling that I cannot trust the institution to keep that 1% for very long, and they might lower it after I've had my money with them for a while, and then it'd be either accept the new lower % or start a new savings account search...

Is my reservation reasonable? If not, which institution do do think I can trust to not lower the interest rate a few months into me working with them?

Thank you for bringing this up, as I am indeed still considering a 1%-like savings account for the first EF tier...

LC
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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saltycaper
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Re: Which Bond Fund As Emergency Fund?

Post by saltycaper » Tue Oct 04, 2016 4:31 pm

Thinking a bank might lower rates is reasonable, but it's not something to worry about IMO. Just move to another bank if you find the rate difference worthwhile. It's easy to open/close accounts. Unlike a checking account, presumably you would not set up many links to this account other than one or two ways to move money in and out. I have savings accounts at two different banks, and neither has had frequent and drastic rate changes.
Quod vitae sectabor iter?

Sailor36
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Re: Which Bond Fund As Emergency Fund?

Post by Sailor36 » Tue Oct 04, 2016 5:08 pm

One disadvantage of using a bond fund for an emergency fund is that any spending from it will complicate your tax return.

Fluctuations in the share price will produce capital gains or losses, which need to be accounted for on Schedule D. If you make regular purchases and/or reinvest the distributions, you may run afoul of wash sale rules.

rgs92
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Re: Which Bond Fund As Emergency Fund?

Post by rgs92 » Tue Oct 04, 2016 6:58 pm

I use FSBAX (FID S/T TREASURY BOND INDEX PREMIUM). Very low volatility, ER 9 basis points. YTD 2%, 10 year annualized 2.87%, 30-day yield .84%/year.

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Munir
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Re: Which Bond Fund As Emergency Fund?

Post by Munir » Tue Oct 04, 2016 7:10 pm

Lieutenant.Columbo wrote:
Munir wrote:Lieutenant.Columbo,

Multiple respondents have suggested online savings accounts yielding slightly over 1% for your emergency fund but I don't recall you stating your opinion about such accounts. Do you have reservations about this option?
Hi Munir,

My only reservations about savings accounts yielding 1% is that I get the feeling that I cannot trust the institution to keep that 1% for very long, and they might lower it after I've had my money with them for a while, and then it'd be either accept the new lower % or start a new savings account search...

Is my reservation reasonable? If not, which institution do do think I can trust to not lower the interest rate a few months into me working with them?

Thank you for bringing this up, as I am indeed still considering a 1%-like savings account for the first EF tier...

LC
Your reservation is reasonable but it also applies to any bond fund as far as its yield and total return. Only a CD can guarantee a fixed rate but it is not liquid unless you break the lock on withdrawals and pay a penalty. If yields go up, you will be stuck with a CD with a low rate. Without studying the issue in depth, it seems that there is a downside to every choice. Only you can decide which is the downside (if it happens) that you can live with. The online savings account is probably the most flexible choice if you want to get out of it in the future.

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dratkinson
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Re: Which Bond Fund As Emergency Fund?

Post by dratkinson » Tue Oct 04, 2016 7:49 pm

Sailor36 wrote:One disadvantage of using a bond fund for an emergency fund is that any spending from it will complicate your tax return.

Fluctuations in the share price will produce capital gains or losses, which need to be accounted for on Schedule D. If you make regular purchases and/or reinvest the distributions, you may run afoul of wash sale rules.
+1

But these tax situation can be handled by:

--Wash sale. Redirect all distributions to your checking/savings/mmkt fund. In this way you control when you buy "replacement" shares, so avoid a wash sale. (If interested, Vanguard has a tax-exempt mmkt fund: VMSXX.)

--Capital gains. Set all funds/ETFs to use "specific ID" cost basis. In this way you control which shares are sold so can minimize capital gains.


Above apply to all funds/ETFs (stocks/bonds) in taxable. Add above to this:

--Protection of tax-preferential treatment of muni dividends. Recommended muni funds accrue dividends "daily" and pay them monthly or more frequently. These "daily accrual" muni funds are exempt from IRS 6-mo holding period requirement so protect TE dividends. Meaning you can sell at any time and not lose tax-preferential treatment of TE dividends.
See "Fine points about tax loss harvesting": https://www.bogleheads.org/wiki/Tax_los ... harvesting

...and you get a muni bond fund that is easy to live with and acts as both a portion of your bond allocation and a tier of your EFs.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Lieutenant.Columbo
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Re: Which Bond Fund As Emergency Fund?

Post by Lieutenant.Columbo » Fri Oct 14, 2016 9:12 am

oldzey wrote:
Lieutenant.Columbo wrote:
oldzey wrote:I use VWITX (Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares) as the second tier to my emergency fund (a high-yield savings account is my first tier).
thank you very much for your input
would you mind explaining how/why you picked VWITX?
Since it's my second tier EF (which I've never used), I don't mind taking a little more risk than a short-term fund.
and how many years in expenses each of your EF hold?
I hold 6 months of expenses in VWITX and 1-3 months in 2 high-yield savings accounts. I also use credit cards (with cashback rewards) if I run low on cash (in checking account) towards the end of the month. I've never paid a penny in credit card interest in the 17 years I've used them.
also, do you hold other bond funds that you do not consider part of your Emergency Fund?
Yes, TIAA Traditional in my 403b is my only other fixed income asset.
thank you very much!
oldzey,
two questions:
1. are you retired or active?
2. what % do you aim for with your [TIAA]+[VWITX]+[high yield savings account] versus equities?
thank you very much!
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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