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After reading all the advice on TMF about putting emergency fund in Bank or Money Market, I made up my own mind and ignored the advice.

I've put $10k in VBMFX. My reasoning? :-

Although the NAV of the index fluctuates it only appears to do so within a few percent (I think the difference between the highest and lowest in 5 years is around 12% and over 10 years is <20%). Ignoring capital movement the yield seems to be 6%-7% which is 2%-4% better than I can get at the bank or money market. As I intend to leave the money as a permanent emergency fund (until I retire in 20 years) it would seem after 3 or 4 years the extra yield will have compensated for any future capital risk (and that includes me buying at the top of the market). I can get immediate access to short term use of part of the fund and replace it as needed.

But, it occurs to me that if it was that easy then why isn't it espoused by TMF. I have the uncomfortable feeling I have missed something glaringly obvious to the Foolish on this board?

Comments please...

MAS

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I've put $10k in VBMFX. My reasoning? :-

Although the NAV of the index fluctuates it only appears to do so within a few percent (I think the difference between the highest and lowest in 5 years is around 12% and over 10 years is <20%). Ignoring capital movement the yield seems to be 6%-7% which is 2%-4% better than I can get at the bank or money market. As I intend to leave the money as a permanent emergency fund (until I retire in 20 years) it would seem after 3 or 4 years the extra yield will have compensated for any future capital risk (and that includes me buying at the top of the market). I can get immediate access to short term use of part of the fund and replace it as needed.


As you noticed, the NAV is likely to fluctuate with interest rates. The last 18 months have tacked on around 10% to the NAV. Similar movement the other way would have the opposite effect. If the NAV dropped, and you needed the money for a legitemate emergency, you might face having to liquidate the fund at a loss. While it's intended that the emergency fund will be permanent, it doesn't always work out that way.

When I setup the emergency fund, I looked at VCITX and I-Bonds.

Given that I inteneded the fund to be as permanent as possible, I didn't want to pay income taxes on the interest every year. So, you may want to consider a bond fun like VCITX. Depending on your tax rate, the effective yield may be higher then the same in VBMFX.

However, investing in a muni bond fund still has the issue of a fluctuating NAV. So I purchased I-Bonds. Good rate of return, deferred taxation, safe, and they're easy to cash. They are my personal favorite vehicle for "emergency" savings.

-Ortman
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However, investing in a muni bond fund still has the issue of a fluctuating NAV. So I purchased I-Bonds. Good rate of return, deferred taxation, safe, and they're easy to cash. They are my personal favorite vehicle for "emergency" savings.

-Ortman


I briefly looked at I-bonds but was put off by the 6-month lock in (you know Murphy's law), but it occurs to me they would be ideal for additional savings and can then be considered part of the emergency fund after 6 months.

Thanks for the tip.

MAS
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I briefly looked at I-bonds but was put off by the 6-month lock in (you know Murphy's law), but it occurs to me they would be ideal for additional savings and can then be considered part of the emergency fund after 6 months.

In that case, buy half of them, wait six months, then buy the other half. Or something like that...

-Ortman
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I briefly looked at I-bonds but was put off by the 6-month lock in (you know Murphy's law), but it occurs to me they would be ideal for additional savings and can then be considered part of the emergency fund after 6 months.

I had CDs and a chunk in a money market account, but I still moved into I-Bonds over a period of a year so I wouldn't have too much less than the equivalent of 6 months of living expenses liquid (went down to 4 months liquid) during the transition.

So now I have a two-tier emergency fund: the equivalent of about 4 months of living expenses in I-Bonds, and the equivalent of about 4 months of living expenses in my credit union's money market account.
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As true "emergency" money, consider a home equity credit line, if you are in a position to get one and currently have minimal credit debt. That way, you're "free" to invest your extra cash in the manner you're comfortable with.

Otherwise, I'd opt first for the I-Bonds, then either a regular or tax free MMF, dependent upon your tax situation. My third choice would be a short term bond fund.

HTH,
John
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As true "emergency" money, consider a home equity credit line, if you are in a position to get one and currently have minimal credit debt. That way, you're "free" to invest your extra cash in the manner you're comfortable with.

The problem with a HELOC as one's emergency plan is that if one's income stops for whatever reason (e.g., layed off), the HELOC can also disappear. And if one doesn't already have a HELOC, one won't be able to get one without some sort of income. (Some people think banks will loan based on the collateral. Reality is that banks loan based on one's ability to pay back, foreclosing on the collateral being a recourse if payments aren't made.)
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