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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35383  
Subject: Re: Help with bonds and short term investments Date: 12/12/2002 2:54 PM
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Ben,

The emergency fund part is relatively easy. As I've mentioned before, I think it is important to divide what many people call an "emergency fund" into two conceptually different funds: one for everyday things that go bump in the dark (like a new engine for the car) and one as a rainy day fund, for major illness and unemployment.

If you are relatively securely employed (is anyone?), you can probably just keep enough money easily on hand, like in a bank money market, to get you through the everyday emergencies—I've got about $3000, with $2000 as the minimun needed to get money market interest, anyway. For the contingency fund, it's a toss-up—a few months ago, 5-year CDs were clearly a better choice than US Savings bonds, but CD rates have come down. if you've got a big lump sum, I'd probably go for a ladder of 1,2,3,4,5 year CDs. If you are trying gradually to build up your contingency fund, then it's really like dollar cost averaging by dripping money into an index fund, and you might as well go for the 5-year CDs each time you buy. Or, look at EE or I bonds. A lot depends on your state tax situation (if you have high state income taxes, US Savings bonds are a better bet than if you have low state income taxes). In a 30% federal bracket with 4% state income tax, it takes about 20 years for a US Savings bond to catch up with 5-year CDs if its average yield is about .5% lower. But, at your age, if you really don't touch the money,Savings Bonds are probably a better choice. We've debated between I-bonds and EE bonds at current rates—historically, I-bonds at current fixed rate should underperform EE bonds over time, but it seems quite possible we will go through a period over the next few years where treasury bond yields (upon which EE bonds are based) will stay low, but inflation will not. Then again, who knows.

As to the retirement funds: you've got 40-50 years. Given the low interest rates, I'd probably go ahead and continue dripping into the stock index. With 20 years, I've stopped. With Roths, for which I figure 40 years (or death first), I'm going with the balanced index fund. But we've got enough stock index money already, if stocks do okay, and far too much if they don't.
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