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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75378  
Subject: Re: Invest extra cash? Date: 4/13/2012 10:48 PM
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"If so, what should they put the money into? Would short term bonds, or bond funds be a good choice?

I think that they might want to keep at least enough money for one year’s worth of expenses (minus social security) in cash for an emergency fund"

You can get better yields these days in bonds and in dividend paying and preferred stocks. Now that people are starting to talk about inflation and rising interest rates again, one must be careful about buying bonds. Their value will fall if interest rates rise. In this situation diversification may be your best approach. By selecting several choices, hopefully you will have more options if needs for funds arise and some will be more attractive than others.

Short term bonds avoid the interest rate risk, but usually the price is low interest rates. A laddered maturity bond portfolio constructed of 5 years living expenses (net of Social Security or other sources of income like pensions, annuities, etc) is the classical Foolish way to live off of investment income while having the income from the bond portfolio and the maturing bond each year as a buffer against market declines (forcing you to sell in a down market). (Interest rate risk is reduced by holding the bonds to maturity.)

The emergency fund aspect depends on size needed. Given time with assets as you describe most people can work out the best method to pay the extra expenses. But short term you can need cash. A credit card with adequate borrowing limits should cover you for at least 30 days. After that a bond fund can be used. Many allow check writing. So the funds continue to earn interest until the check clears. But you do take interest rate risk on the bond fund. Hence, it becomes important to size it appropriately for the emergencies you may need to cover.
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