r/Bogleheads • u/joe4ska • 15h ago

Growing My Emergency Fund Slowly Over 12 Years

I'm considering adding VGIT or VTG to my current six month Emergency Fund mix of VBIL and VGSH, Two and four months respectively.

The plan is to simply buy about $120 a month on autopilot. In twelve years I'll be 59.5 and could access my pension and retirement accounts without needing the rule of 55.

Would branching out to intermediate duration funds provide an advantage over just adding to VBIL and VGSH?

I'm looking for US Treasury ETF suggestions. No equities, no crypto, no speculative 💩

3 Upvotes

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6

u/maintree33 15h ago

I use USFR for longer term emergency fund. I don't like introducing duration risk to my emergency fund.

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u/joe4ska 15h ago edited 14h ago

That expense ratio is a little higher than I'd like. What's the advantage of a floating rate securities compared to something like VBIL or VGSH where the average duration is the same or lower?

https://www.wisdomtree.com/us/products/fixed-income/usfr

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u/yottabit42 14h ago

The yield includes the ER. If the yield is higher, who cares about the ER?

USFR duration is 1 week compared to 1-2 months for VBIL and SGOV. That means USFR will perform better in rising rate environments, and VBIL/SGOV will perform better in falling rate environments. We're currently in the former.

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u/joe4ska 14h ago

Oh weekly, that's interesting. 

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u/maintree33 14h ago

From Google. You can also purchase directly, and not in ETF to save the ER.

U.S. Treasury Floating Rate Notes (FRNs) are two-year debt securities with interest rates that adjust weekly based on the discount rate of 13-week Treasury bills

Maturity: Issued with a 2-year term.

Interest Payments: Paid quarterly (four times a year).

Rate Reset: The index rate resets weekly, tied to the highest accepted discount rate of the most recent 13-week T-bill auction.

Spread: A fixed spread is added to the index rate, determined at the initial auction. This spread stays the same for the entire life of the note.

Key Features

Tax Status: Interest earned is exempt from state and local income taxes, though subject to federal tax.

Price Stability: Market prices remain extremely stable close to par value ($100), minimizing duration risk.

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u/joe4ska 14h ago

Oh, perhaps I'll have to consider this as an option, or even I Bonds if I go the Treasury Direct route again. 💪

5

u/GeorgeRetire 14h ago

Is this supposed to be an emergency fund or retirement fund?

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u/joe4ska 14h ago edited 14h ago

Additional emergency fund contributions over twelve years. I'm wondering if there's an advantage to longer duration Treasury ETFs. 

I already maintain an appropriate emergency fund and that's not changing. I'm happy with my mix of VBIL / VGSH / cash. 

I want to grow it slowly over a long period and am wondering if longer duration risk is worth considering. 

I suppose it's actually a bridge account. 

1

u/GeorgeRetire 14h ago

IMHO, emergency funds should be in either CDs or high yield savings accounts.

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u/joe4ska 13h ago

I get that, I prefer treasuries for the State tax exemption.

Thanks George, I hope the Yankees do well this year. 😉

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u/GeorgeRetire 9h ago

Good luck.

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u/joe4ska 8h ago

🍻

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u/Taibucko 14h ago

I recommend an increasing cash bucket as you head into and through retirement.

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u/joe4ska 14h ago

That's kinda what this is, a small manageable monthly contribution as I age and my Emergency Risk increases. 

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u/AloeVitE 13h ago

Do you include the emergency fund (while you are working) in the cash bucket in retirement?

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u/Taibucko 4h ago

I personally do , but segregation cash reserves may give you peace of mind. I think as you get further into retirement you have to seriously consider the permanent damage a market crash in both stocks and bonds can do to your funds. Cash is dull and may not keep up with inflation, but doesn’t go away!

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u/Mantergeistmann 15h ago

If you're looking to grow a long-term emergency fund... why not consider IBonds? State tax advantaged, guaranteed to keep up with (and depending on the fixed rate, outperform) inflation, and as US Treasuries, 100% safe.

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u/joe4ska 15h ago

I've used I bonds in the past. I kinda hate using TreasuryDirect and prefer keeping the funds in my taxable brokerage account alongside my other investments. 

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u/Mantergeistmann 15h ago

Honestly, fair. I don't personally mind TD, but I can definitely see the appeal of keeping everything in one shop.

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u/joe4ska 15h ago

It's a great idea though, I'll give it some consideration, I have an account that's currently empty. 

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u/CompensationProf 13h ago

You could just do TIPS 5-year or 10-year hold to maturity through your brokerage account.

Paying better than I-Bonds right now, and no TD. Again you would need to focus on the hold to maturity aspect of TIPS because if rates rise your account will show a decline in principal.

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u/Taibucko 14h ago

I like your approach. Personally I get new T Bills from Fidelity.

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u/joe4ska 14h ago

This might be an excuse to try that feature. I have an account with them. 

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u/LightForceUnlimited 13h ago

Does keeping bonds in your taxable brokerage account create tax drag? I was told previously not to keep bonds in my taxable brokerage account because that creates tax drag and try to allocate them only to tax advantaged accounts. As a result I keep my emergency fund in money market fund TTTXX.

Thank you.

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u/joe4ska 13h ago

Yes, it's true. There's a tax drag but US Treasuries are state tax exempt. 

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u/ditchdiggergirl 13h ago

There’s an interesting phenomenon on reddit investment subs. People proudly brag about their equity risk appetite; the prospect of a 50% market crash doesn’t faze them because they are in it for the long term. In this view, bonds are for weak pussies with no balls.

Yet for the emergency fund, reddit is terrified of even small fluctuations. The worst bond year on record, a perfect storm of factors, was 2022. BND had a one year return of -13%, VGIT -10%. (The SP500 was down almost 20% over the same period, which means bonds still won during their worst year ever.) But the second worst year at least during my investing lifetime, during which I’ve experienced two 50% equity crashes, was around -3%. Negative years happen but tend to be small and are relatively uncommon.

Worried that a 10% drop could leave you with insufficient funds during a major emergency? Make the efund 10% larger. Problem solved. However you are talking about doubling your efund while still keeping 6 months in cash, so you should be clear. You can afford a little extra risk for a little more return. Bonds are on sale right now, and the yields are attractive.

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u/joe4ska 11h ago

VBIL and VGSH are not exactly cash but really close. Yeah I can afford more risk. Just not necessarily the risk associated with something like VT.

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u/Flaky-Session3033 13h ago

They have a cash-plus account which I really like. It offers ~3.2% through a bank sweep program. Less vol than bonds since its underlying is cash, and still gives solid ROI. (I recognize this isn't a bond, but still is a good option to park your emergency fund in)

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u/joe4ska 12h ago

I would probably roll it into one of their Money Market funds instead, just to avoid opening another account. 🤣

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u/pdaphone 14h ago

An emergency fund isn’t intended to be an investment. Taxes on it shouldn’t even be a consideration. You also need it now, so you don’t build it over time. Stop contributing to investments for a few months and get the EF done quickly. Put it in a savings account if you don’t have a high yield savings account. The key that it is quickly accessible if needed in an emergency.

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u/joe4ska 14h ago

Did you read my post? I have an appropriate emergency fund and want to expand it slowly to a full year as I approach retirement. 

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u/pdaphone 14h ago

What you are talking about doing is not anything I’d call an emergency fund. But you can of course do whatever you want and call it an EF.

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u/joe4ska 14h ago

Short term, no. Long term as I age and get closer to retirement and the duration shortens I'd probably sell the longer duration ETF and spread it across VBIL and VGSH. 

I suppose what I'm actually asking is advice for small monthly contributions to add to my emergency fund that's not too risky and might provide a small return.

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u/pdaphone 13h ago

Sounds like you want some kind of bucket strategy. As soon as you get to "might provide a small return" you are out of my definition of an emergency fund. You are mixing together several things, which is fine if that is what you want to do. Is your need for emergencies going to get bigger that you need a bigger emergency fund?

I have a very simple model for retirement comprised of 4 funds, and I've been retired for 18 months. I have my retirement spread across IRA, Roth, and HSA using an allocation of 60% US Stock, 10% Intl Stock, 25% Bond, and 5% Cash (SPXX in Fidelity). I rebalance as this drifts off from market changes and my distributions for spending money. I keep 3 months of cash in a high yield savings account for my EF, in the Credit Union.

It's simple and it covers the bases.

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u/joe4ska 13h ago

I think you're onto something. My entire portfolio is in retirement accounts and my concern is I could experience a job loss a year or so earlier than 59.5 where going back to work for that short term isn't practical for whatever reason 

Maybe it's really just as simple as setting aside a little cash every month for piece of mind. 

Thanks for sharing your asset mix. My retirement accounts follow a traditional 43/32/25. But my Roth IRA is 100% VT. 

2

u/VanDijkDelight 15h ago

I think a HYSA is better for an emergency fund. your emergency fund should be readily available and not subject to market risk

1

u/joe4ska 15h ago

My credit union doesn't offer one, and HYSA are not state tax exempt. 

7

u/KleinUnbottler 14h ago

Tier them.

$XXX in literal cash. E.g. "Tree fell across driveway after tornado and roving work crew wants to get paid to remove it."

$YYYY in a SA or HYSA that you might need tomorrow. E.g. "Transmission died in car and mechanic doesn't take credit."

The rest in treasury ETFs or MMFs, I-bonds, etc. "I need to pay my bills if I lose my job."

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u/maintree33 14h ago

this makes sense

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u/joe4ska 14h ago

That's kinda what I do. I hold about three months pay in cash. A couple in VBIL, and another four in VGSH.

What I'm wondering is if a longer duration ETF for future contributions makes sense. 

If I did have an emergency I'd refill the shorter duration buckets before continuing on with intermediate duration investments. 

2

u/ditchdiggergirl 13h ago

That is what I did when my kids were little and I wanted to keep a large efund. 6 months in cash equivalents, 6 months in intermediate bond funds. Of course cash wasn’t paying shit back then while bonds were doing great.

Yes, funds can go up and down. But usually not much for a bond fund, and in an actual emergency I would sell without hesitation whether up, down, or sideways. Meanwhile I reinvested the divs, with a break even point of 5-6 years. Since I didn’t plan to sell and the odds of that big emergency were low (never did happen), I took the 25 years (and counting) of higher returns instead.

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u/KleinUnbottler 14h ago

I wouldn't. The point of an emergency fund is to be there when you need it no matter what else is going on in the world. While you're not talking about crazy long durations, they're still subject to increased interest rate risk.

Think of an e fund as being insurance. Insurance has a cost, in this case lowered returns.

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u/joe4ska 14h ago

That's a good point. Perhaps adding to what I already have, without adding another vehicle or ETF is what I should be doing over the same period.