Emergency Savings

[itmorr]

Hi,

I am interested in optimizing my savings allocation and I am a little hazy on asset types and their reasonings. The savings amount is one year's worth of my expenses today. Could you please recommend allocations and justifications?

Examples: Savings account / CDs, bond fund, strategic income fund, gold / swiss account

Example template:
70% savings account
30% open-end bond funds
Justification: Savings account is secure and only loses a little value to inflation. Bond funds grow a little faster and can be converted into cash easily. CD rates are terrible. Bond funds are usually super low risk.

Thanks in advance

[kork13]

Bond funds are a valid option, but I'd personally recommend something even more stable for your EF. Although it appears that federal lending rates will be fairly stable for the next year or two, if/when they do start to rise, bond funds will lose value. As an investment, that's a perfectly reasonable risk, and normally one worth taking. But for your EF, you should have little to no risk whatsoever.

CD's would normally be the recommended alternative, but as you say, those rates are terrible right now. Personally, I'd recommend federal I-Bonds. I-Bonds bought this month (through April) are yielding 3.06% right now (which is historically low... on a long-term average, they've been about 4% or better). They're indexed for inflation, which provides additional protection to your EF besides being guaranteed by the federal government. There are certain restrictions on I-Bonds (can only buy $5k/yr, can't sell for the first year), but I'm a big proponent of using them as part of a mixed cash/I-Bond emergency fund. My EF is about 30% cash, 70% I-Bonds.

ETA: Similar to I-Bonds, individual corporate or municipal bonds *could* be used, but there is more risk involved there, mostly involving the possibility of default by the bond issuer. However, holding individual bonds overcomes the bond fund's sensitivity to federal interest rates... the return would be the same, no matter what, until the bond's maturity (though if you sell it before maturity, you could potentially lose money if rates have gone up).