The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Brokefuturedoctor on November 11, 2016, 06:16:50 PM
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Is using a bond fund as a pseudo-savings account something that people do?
I have been trying to help my mom out with her retirement goals as well as saving for a down payment on a house. We have the retirement accounts all set, but I am wondering where to put her money that she is saving for the down payment. She would love for her timeline to be as short as possible which isn't really feasible currently. She raised my brother and I by herself and is helping me out with living expense while I am in school (which I am extremely grateful for), so she has never had the opportunity for much savings as it is. She was out of work for close to a year not to long ago, so as soon as she got her current job (she is a pharmacist) I began advising her to save up an emergency fund again before saving for a down payment.
Ideal timeline: ASAP
More realistic timeline: 1-3 years depending on what she buys
All that context just to ask, is using a bond fund to store down payment money a good idea?
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The only kind of bond fund you could consider for this purpose is short-term very high quality ones because you would need to absolutely minimize the risk. But in this low interest rate environment you wouldn't be well compensated for the risk you'd take. In my opinion you'd be much better off with a well-chosen CD from a credit union or online bank (brick and mortar banks tend to pay negligible interest on CDs these days): Similar or possibly slightly better returns with little to no risk. Just make sure you're guaranteed the right to withdraw the funds at any time and the early withdrawal penalty is reasonable.
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What if the bond fund drops -2% in the last week when you need it?
That's how much Vanguard Total Bond dropped this past week. An alternative might be a certificate of deposit (CD) which won't lose money and earns 1.5% to 2% per year.
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Short maturity bond funds like vcsh give a bit better yield than the bank ... but they do have a little more risk. If your time line is 5 years or greater, the risk becomes minimal, but at less than 5 years, you should really just plop it in a high interest savings account.
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Alright, based on what you all have said it will be a high interest savings account or CD because the timeline is so short. Thanks!