Short term savings in high yield saving account or bond mutual funds?

[BigVic]

Could someone please educate me on why most people go with high yield savings accounts for their short term savings instead of bond mutual funds?

[Broken Arrow]

Well, for me, bond mutual funds require that I transfer money into my investment firm's account, then buy the fund. When I need the money, I need to sell it and then transfer back out.

Perhaps a better reason is that bond mutual funds comes with principal risk, which depending on the situation, ranges from acceptable to... not acceptable.

But contrast that with my credit union, where I currently enjoy a very competitive rate of 3% APY with full liquidity and basically no principal risk....

For less than 2 to 3 years, I think bank products will work just fine, especially if you are not willing to take any risk with your principal amount. For 3 to 5 years or more, then I think bond funds make more sense. Or better yet, if you're willing to shop around and take on a bit more perceived risk, perhaps certain types of individual bonds are better still.

For example, I've been championing certain corporate bonds such as Wal-mart, where the yields remain very high, but capital risk really is minimal. They're not the only ones though, and as the bond market continues to change, other deals may surface as well.

[EEinNJ]

In addition to the risk the NAV of a bond fund will go down, there's also the tax headache, especially if you re-invest dividends, and short-term redemption fees. With a savings account it's just interest income.

Oh, and some bond funds turned out to have sub-prime CDO's and lost a lot (like one of Schwab's Total Bond funds)

[disneysteve]

As the others have said, bond funds have risk that is generally not appropriate for short term savings. That is usually money set aside for emergencies or short term goals like a vacation, buying a car, a house down payment, etc. That isn't money that you want to take a lot of risk with. It would suck to put away 40K for a down payment and have it only be worth 30K when you are ready to settle on your new house.

[jasonnoguchi]

Bonds are risky if you see yourself selling it anytime before maturity as face value fluctuates with market demand but saving accounts basically preserves your capital anytime you need your money.

[investingnoob]

It's very hard to find a high yield savings right now.
I currently have 1.75% with ally, to get higher you might find a small local bank. For me I'm okay with a bond fund risk, and to get higher yields you must have some risk.
So hopefully I will get a good yield from my bond fund..

[kork13]

Not to say that it's the best way to go, but I'm keeping a fair part of my mid-term savings (~4-8 yr outlook) in a GNMA bond fund. Although the value of the fund is obviously not guaranteed, the assets behind the bonds are guaranteed by the US government, so they are somewhat safer than other types of bond funds. By how much, meh, I'm not sure. But I'm okay with keeping about 30-40% of my mid-term savings there. It has modest, historically consistent returns, so I'm comfortable enough with it.

Shorter term than that, I really can't find anything much better than a revolving CD ladder.... I'm working on saving up enough to start a decent-sized one... Otherwise, I seem stuck with regular savings accounts, at the mercy of whatever rate changes they decide to give me.

[BigVic]

Thanks everyone. I've got it now. I've also seen some checking accounts around at 3-4%. Wouldn't these be better if one could be disciplined enough to save in that account?

[skydivingchic]

I have one of the 4% checking accounts. Obviously if some of the money is actually your savings you have to be disciplined enough to not spend it. I use Mvelopes, so this isn't an issue for me - I have the savings portion of my checking account balance in its own envelope. All the checking accounts I've seen paying this type of interest cap the amount they pay the high interest on - usually $25000. I also have a savings account at the same bank as my checking which pays 2.5% assuming my checking account meets the requirements each month (10 debit card transactions, one direct deposit or direct debit, electronic statements). I keep anything over the $25000 limit there.