Hey guys! With interest rates on saving accounts and money market accounts being at historic lows (a recent search on Bankrate.com showed the best rates at 0.50-0.60%) I have been getting asked a lot lately where can I put my cash? It is not making any money man! Well, I thought about this and did some research on alternatives to traditional savings or money market accounts and found a few options.
While I am not a financial advisor and cannot recommend specific funds, you could put your emergency fund in a short-term bond ETF. I will use VGSH, Vanguard’s Short-Term Treasury ETF as an example. I chose an ETF as while there are many mutual fund options, there are often rules that limit how often you can buy and sell the fund that do not exist with ETFs. With an expense ratio of 0.13% and 2.88% after-tax performance over the last year, this is an attractive option. If my emergency fund were $15,000, I would have made $413 this year versus $75 in my boring ol’ savings account.
You could look further at the composition of the fund and see how safe this is. This is made up of 99.95% of U.S. Government Bonds in the 1-3-year range. Does not get much safer than that when it comes to investments. Little risk, right?
You could take a little more risk and put your money in BSV, Vanguard Short-Term Bond ETF. Year to date it has made 4.59%. With $15,000 in your emergency fund that is $688 before taxes. Wow! This fund has more risk though with 73% government bonds and 27% corporate bonds.
But hang on a sec.
There are a few things to ask before doing this:
What is the purpose of this money?
How long would it take to get access to the funds if you needed it immediately in an emergency?
Can you handle the ups and downs of the market? Your funds will fluctuate and will lose money some days, make money on other days.
Think about the answers to these questions before doing this.
Your emergency fund is there to provide peace of mind during a crisis, not make you money. If you had a true emergency, you would need immediate access to the funds. I recommend having a linked checking account with a debit card to your emergency fund so you can quickly transfer funds and pay that plumber who came late Saturday night or HVAC company who replaced your furnace in the dead of winter.
If your money was in the market it could take minimum of 3 business days to get at the funds as you would need to wait until the market is open, sell the shares needed, then wait for the funds to transfer to your checking account. What would you do in the meantime? Are you going to log into your account every day and watch the performance? How would you feel if your account took a big drop one month?
Remember your emergency fund is insurance against a crisis, not an investment. Park your cash in a decent savings account and forget about it! Try not to look at it. Is the risk worth a few hundred dollars? It will be there when you need it most.
Thanks for taking the time to read through this, and please reach out if you have any questions or there is something you would like help with.
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