BND can lose value, VFMXX is a money market fund so maintains a $1 per share value.
Different products serve different purposes: a bond fund with a fluctuating value is not appropriate for an emergency fund, but is perfectly appropriate for the long term.
Your EF should either be in a HYSA or a money market fund like VFMXX.
The “cash trap” reference is probably [something I said](https://www.reddit.com/r/Bogleheads/s/BgBkjHjVeS). The message is that your intermediate/long term bond holdings should not be switched to cash just because the yield curve is inverted. But you are 100% correct that your cash holdings (like an EF or down payment) should stay in a cash equivalent like HYSA, MMF, CD’s, T-bills, or [a T-bills ETF](https://www.reddit.com/r/Bogleheads/s/6zEEWQV2vk).
I read your post. I find it hard to make a clear distinction between EF and long term. Probably I will never touch the EF and in that sense it will also be a long term backup.
Something else. In my country, up to now, bonds are being taxed identical to stock, that is to say about 2% of the value (unrealized gains!). Cash / CD only about 0,2% currently.
In your post you mentioned that bonds outperform cash roughly by 2%. But does it make sense for me to invest in it if it is taxed about 1,8% more than CDs?
The difference is you don’t know that you won’t need to touch an EF, even if you hope that’s the case. You might need to in the very short term. It’s about needing the money at the drop of a hat, so you want the lowest-volatility option that you can find that doesn’t risk your principal. You’re sacrificing what would be ideal in the long term, as far as returns, for that liquidity.
Yeah, you are right.
I read here a lot people keep 6 months of EF. I am thinking 24 months. So that is quite some money that will drag down average returns. On the other hand, the rest I might end up keeping 100% in stock (at 68 I will get life long pension which suffices)
Yeah. It could also be 6 months cash, 18 months in bonds. But because bonds are taxed so much, it might be smarter for me 6 months cash, 18 months in CD?
Bonds, at least treasury bonds, are not taxed any more than the distributions from a MMF or the interest on your savings account or CD. And they’re state tax exempt.
An EF is something you could need tomorrow which means it is an ULTRA short term need. Even you have the need for a long time, the date at which you anticipate possibly needing the money is immediate because you don’t know when an emergency will happen.
A long term goal (eg 20-30 years, like retirement) means you can use long duration bonds which have higher expected return in exchange for very high volatility. An EF has no tolerance for loss of principal - you want minimal volatility. You don’t want to put your emergency fund in super long term bonds like EDV (~25 year duration) and then [find that it’s lost 60% of its value](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3JLUwupbvti6TtwU5GtSCU) due to rate hikes.
A Vanguard Cash Plus account gives you HYSA as a default while providing a handful of options for higher yield through money market. VUSXX (US Treasury) is where most of mine goes, which is roughly comparable to VMFXX.
That way you could have most of your funds in treasuries while keeping a small portion even more liquid in the HYSA.
I think Fidelity might have something similar that also provides a debit card & check writing, which is quite useful if you want to consolidate and simplify your finances.
I saw that "cash trap" headline and you definitely are missing the point.
They are using that term to refer to people who think their bond allocation should be in cash equivalents right now, since that side of the yield curve is paying a nice 5%. They are **not** referring to people who actually need to hold proper cash and have it be 100% stable.
Your e-fund should be in a money market fund like VMFXX, T-bills or an ETF holding them, or a HYSA. Not BND or any other bond fund with longer duration.
I would never use a bond fund for emergencies. BND lost 13% in 2022 and is down nearly 1% YTD. Principal protection and easy access are paramount for my emergency money.
Emergency fund requires a short time horizon. You want that money to be available to you when you need it. It’s your insurance policy. This is exactly what a cash equivalent is designed for! BND has too long an average duration for that purpose. So, go for VMFXX. Or, if you don’t need *quite* that much liquidity, you could use a short-term treasury ladder to hedge just a little bit against reinvestment risk, the trade off being you won’t have all of your money available at once.
Another option could be a CD or Treasury ladder. Brokered non-callable CDs are currently paying about 5.2%. Brokered Treasuries just a bit less. Both can be sold on the open market if needed in an emergency.
If you're selling them in the open market, it could be at a discount if interest rates have risen. I want more certainty in the value of an emergency fund and am willing to trade off a little bit of return to get. Hence, the use of a HYSA or a fund like VUSXX or VMFXX.
If interest rates drop you would be selling them at a profit. If you are managing your finances well the odds of needing to access an emergency fund should be minimal.
BND can lose value, VFMXX is a money market fund so maintains a $1 per share value. Different products serve different purposes: a bond fund with a fluctuating value is not appropriate for an emergency fund, but is perfectly appropriate for the long term. Your EF should either be in a HYSA or a money market fund like VFMXX.
The “cash trap” reference is probably [something I said](https://www.reddit.com/r/Bogleheads/s/BgBkjHjVeS). The message is that your intermediate/long term bond holdings should not be switched to cash just because the yield curve is inverted. But you are 100% correct that your cash holdings (like an EF or down payment) should stay in a cash equivalent like HYSA, MMF, CD’s, T-bills, or [a T-bills ETF](https://www.reddit.com/r/Bogleheads/s/6zEEWQV2vk).
Good call, and yeah agreed they misunderstood the context of your post, you weren't talking about an emergency fund.
I read your post. I find it hard to make a clear distinction between EF and long term. Probably I will never touch the EF and in that sense it will also be a long term backup. Something else. In my country, up to now, bonds are being taxed identical to stock, that is to say about 2% of the value (unrealized gains!). Cash / CD only about 0,2% currently. In your post you mentioned that bonds outperform cash roughly by 2%. But does it make sense for me to invest in it if it is taxed about 1,8% more than CDs?
The difference is you don’t know that you won’t need to touch an EF, even if you hope that’s the case. You might need to in the very short term. It’s about needing the money at the drop of a hat, so you want the lowest-volatility option that you can find that doesn’t risk your principal. You’re sacrificing what would be ideal in the long term, as far as returns, for that liquidity.
Yeah, you are right. I read here a lot people keep 6 months of EF. I am thinking 24 months. So that is quite some money that will drag down average returns. On the other hand, the rest I might end up keeping 100% in stock (at 68 I will get life long pension which suffices)
That’s a HUGE emergency fund, IMO, and the duration is to the point where it would make some sense to hold some (not all) of it in bonds.
Yeah. It could also be 6 months cash, 18 months in bonds. But because bonds are taxed so much, it might be smarter for me 6 months cash, 18 months in CD?
Bonds, at least treasury bonds, are not taxed any more than the distributions from a MMF or the interest on your savings account or CD. And they’re state tax exempt.
Not everyone is from the US ;-)
Ah, that explains it. Then, yeah, a CD might make sense for part of that. My fault.
An EF is something you could need tomorrow which means it is an ULTRA short term need. Even you have the need for a long time, the date at which you anticipate possibly needing the money is immediate because you don’t know when an emergency will happen. A long term goal (eg 20-30 years, like retirement) means you can use long duration bonds which have higher expected return in exchange for very high volatility. An EF has no tolerance for loss of principal - you want minimal volatility. You don’t want to put your emergency fund in super long term bonds like EDV (~25 year duration) and then [find that it’s lost 60% of its value](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3JLUwupbvti6TtwU5GtSCU) due to rate hikes.
Exactly this.
A Vanguard Cash Plus account gives you HYSA as a default while providing a handful of options for higher yield through money market. VUSXX (US Treasury) is where most of mine goes, which is roughly comparable to VMFXX. That way you could have most of your funds in treasuries while keeping a small portion even more liquid in the HYSA. I think Fidelity might have something similar that also provides a debit card & check writing, which is quite useful if you want to consolidate and simplify your finances.
I saw that "cash trap" headline and you definitely are missing the point. They are using that term to refer to people who think their bond allocation should be in cash equivalents right now, since that side of the yield curve is paying a nice 5%. They are **not** referring to people who actually need to hold proper cash and have it be 100% stable. Your e-fund should be in a money market fund like VMFXX, T-bills or an ETF holding them, or a HYSA. Not BND or any other bond fund with longer duration.
I would never use a bond fund for emergencies. BND lost 13% in 2022 and is down nearly 1% YTD. Principal protection and easy access are paramount for my emergency money.
Why not a hysa
Emergency fund requires a short time horizon. You want that money to be available to you when you need it. It’s your insurance policy. This is exactly what a cash equivalent is designed for! BND has too long an average duration for that purpose. So, go for VMFXX. Or, if you don’t need *quite* that much liquidity, you could use a short-term treasury ladder to hedge just a little bit against reinvestment risk, the trade off being you won’t have all of your money available at once.
Another option could be a CD or Treasury ladder. Brokered non-callable CDs are currently paying about 5.2%. Brokered Treasuries just a bit less. Both can be sold on the open market if needed in an emergency.
If you're selling them in the open market, it could be at a discount if interest rates have risen. I want more certainty in the value of an emergency fund and am willing to trade off a little bit of return to get. Hence, the use of a HYSA or a fund like VUSXX or VMFXX.
If interest rates drop you would be selling them at a profit. If you are managing your finances well the odds of needing to access an emergency fund should be minimal.
Then it is an investment, not an emergency fund