With inflation dulling the already-low returns on traditional savings accounts, one option you may want to consider is putting your money into short-term bonds.
In this article, I’ll detail what you need to know about short-term bonds and what money expert Clark Howard has to say about them.
Clark’s Take on Short-Term Bonds
A listener recently asked Clark whether short-term bonds are a good option right now compared to online savings accounts.
Clark says they are — with a caveat:
Doing an ultra-short or a short-term bond fund is a relatively low-risk thing, but the value is not fixed at a price per share. So as interest rates rise in the economy, in the shorter term, you could see a loss in value of the funds.
Clark says an online savings account is preferable for funds you need to be able to access immediately but that it’s OK to put additional money, what he calls “your backup to your backup,” in short-term bonds.
What Are Short-Term Bonds?
Bonds are investment instruments governments and corporations issue to finance major projects and other activities.
When you buy a bond, you’re loaning the money out for a specific period of time. When you cash in a mature bond, you’ll get back the money you paid along with any interest earned. Because a bond stops earning interest when it matures, there’s no advantage to keeping it past the maturity date.
Short-term bonds are bonds that mature in less than five years. Ultra short-term bonds mature in less than a year.
Short-Term Bonds: Take Caution
There are two major things to remember about short-term bonds.
Interest Rates May Decrease Value
Clark says short-term bonds may lose value if interest rates begin to climb.
That’s because, when the cost of borrowing money goes up, bond prices usually fall.
Do Not Touch (Until It’s Time)
As with other fixed-income securities, you don’t want to touch your short-term bonds until they’ve matured.
“You can’t think of it as a “mad money” account to be used for immediate availability,” says Clark. “Yes, you can get the money right away, but you may cost yourself in total return of the money you put in.”
While it’s OK to continue to use an online savings account, Clark says, “Putting money in an ultra-short or a short is just fine.” In fact, it’s a strategy he has used with his own money.
For short-term bonds, he recommends that you take a look at Vanguard.
“Vanguard is such a great choice for that,” he says. “They dominate bond funds because their cost structure is so ridiculously low.”