Welcome to Ask Clark, a column designed to answer your financial questions by money expert Clark Howard.
Should I Invest Part of My Emergency Fund In Short-Term Bond Funds?
Ken in North Carolina asks: “With savings accounts and CDs paying such low rates, how do you feel about investing a portion of an emergency fund in taxable or tax-free short-term bond index funds? It seems the risk associated with this type of investment is very low, and there’s a potential to provide greater returns.”
Clark’s Take on Whether You Should Invest Your Emergency Fund in Short-Term Bond Funds
Clark says: “That’s a strategy that I do myself, knowing that you’re earning effectively zero — half a point to .70 of a point in an online savings account — just not much money at all. So doing short-term bond funds — depending on your tax bracket whether you go tax-free or taxable bond funds — is a potential strategy.
“You do have though the chance, even in a short-term bond fund, that you could lose money. If interest rates rise, the value of your holdings in the bond fund could go down, but it is a relatively low risk, low enough that it is the same strategy that I use.”
For short-term bond funds, Clark suggests that you look at Vanguard.
“Vanguard has the lowest cost generally in the marketplace on their bond funds. And the underlying cost of the bond fund is key for what kind of return you’ll earn,” he says.
Read more about where to put your money for the short term.
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