Bond fund for emergency savings

[MooseBucks]

I currently keep about ~35-40k in money market accounts earning 1%. Overall its probably too much in our rainy day fund but I like knowing it is there and easily accessible if I need it.

I'm debating buying a bond fund with a portion of the emergency savings fund. Assuming we cut out all non-essentials our current amount would last approx a year.

Thinking I should move half over and leave the other half in the money market.

Any thoughts or advice is appreciated.

[AJ444]

My checking is done through a Vanguard advantage account where I attempt to keep a 5k minimum balance which is "invested" in a money market fund.

The next tier of our "emergency" fund would technically be the amount we have in our Immediate Term tax exempt bond fund in our taxable brokerage account which currently has a couple years of expenses. The amount is determined by our asset allocation preference, not a goal to have x months in the emergency fund.

If you have determined your emergency fund amount I see no problem having a portion in a bond fund as long as you take into account those funds can decrease in value, given where we are at with interest rates that is a very real possibility going forward.

Which bond fund are you considering?

[snafu]

How often and how much have you drawn from your 'Rainy Day' fund annually? What is the likelihood of drawing out $ 30.K in one fell swoop? If it is only to replace income from loss of employment you would likely draw only one month's income at a time. If it were to replace the roof, it would be at least 3 business days before it was needed.

I've a different view than most SA participants, I believe it's important to keep $ 300. - $ 500. cash, hidden in the house for a sudden emergency, when ATMs are abruptly non functioning and evacuation is required. It's good to have $ 1K [or appropriate] 'float' in a chequing account if that gets you free day-to-day bank services. I suggest two, no cost, low fee, high Morning Star 4 star rated Bond Funds, one short term, one longer term Corporate given the interest rate conundrum of the moment. These can be changed with a few computer clicks. Most of us use MM accounts as gathering pools for sums being collected for the next planned investment.

Personally, I keep the last $ 10K of our EF in a Dividend ETF, it's scary when there is a 20% market correction but I leave it alone 2009 - 2012 and it mostly flourishes. In the future it will underpin our regular, retirement plans.

[MooseBucks]

Which bond fund are you considering?

Haven't done enough research yet but I was thinking Pa tax exempt bond fund.

[AJ444]

Haven't done enough research yet but I was thinking Pa tax exempt bond fund.

Only concern there is you are limiting yourself to the diversification of one state, I have seen other people split into two funds, one of the state in which you reside to take advantage of the state income tax break and another to capture the entire US so you have more diversification but have to pay state income tax.

Being from IL I wouldn't touch a muni fund from my state with a 10 foot pole (if I knew of one that existed) but PA may be a safer bet.

[kork13]

Personally, I use I-Bonds for our (6mo) emergency fund. I'm also using VWITX (Vanguard's tax exempt intermediate term bond fund) for not-quite-short-term savings (think 2-5 year outlook). It keeps only a 5-6 year average duration, which moderates its risks rather nicely in my view, while still earning a respectable return.

Not saying that I've got the best strategy out there.... but as you currently have about 1 year's worth of an EF, you might consider doing half I-Bonds & half in VWITX. At least, that's what I would do, and effectively, I am doing.

[LivingAlmostLarge]

The fixed rate portion of ibonds aren't very high right now.

[phantom]

My husband and I kept about 25% of our emergency fund in a municipal bond fund for about 4 years. We never needed to touch it, so we came out ahead. But, the volatility made us more uncomfortable than I expected it to. We were never stressed in an "oh no, we might have an emergency we can't cover sort of way." But, there were times when the value of the bond fund dipped and we found ourselves really hoping nothing bad would happen that would force us to sell at a loss. Eventually, we decided it wasn't worth the stress, waited for it to be up, and sold it.

[Captain Save]

I would do some research on how risky bond funds might be in a low interest rate environment... once rates start going up trading in and out bond positions might be negatively affect those returns ..but who knows these fund managers might be prepared for that..