I’ve had my emergency funds invested in a Vanguard MMA which has performed quite well in the past year. Post fed interest rate cut though, they are being outperformed by Treasuries. I’m considering swapping my MMA for Treasuries. My MMA is yielding 4.88% this week with a .1 expense ratio. The treasury I’m looking at yields 5.28 with 0.09 expense ratio and is CA state tax exempt. However, it is a taxable event to transfer the funds and I’m not exactly sure how treasuries will fare. I’m really unfamiliar with treasuries and would love some input since other liquid options don’t seem to be competitive.
In my opinion emergency funds by default must be readily available, which means you may give up some interest for liquidity. I would stay with the Money Market…
So you’re saying Treasuries are illiquid? Copilot told me they were liquid. I had this MMA for many years and it did not make a single cent until lately. Perhaps I was unclear. I’d buy a treasury fund through Vanguard.
Well…Treasuries are securities, so you have to sell them when you need the cash. They are also subject to changes in price. I just don’t think that’s what you want in an emergency fund. I think you want the highest yielding cash-equivalent.
A terminology note: Vanguard and similar brokerages offer Money Market Funds. Money Market Accounts are offered by banks or credit unions. The Treasury department offers bills/notes and bonds with maturations ranging from 4 weeks to 30 years. As Butler indicated, if there is a need to sell before the maturation date, Treasuries can be sold on a secondary market but the price may be lower or higher than the original price. Money Market Funds are safer for emergency funds.
Why not do what Warren Buffet does? Just buy short term Tbills (which are exempt from state income taxes.) Short term Tbills are 4,8 and 12 weeks in duration. No fee when buying through Vanguard. I’ve been buying 8 week non competitive bid Tbills every Thursday for over a year and rolling over proceeds into new 8 week bill . Maturing Tbills + interest are deposited into account on Tuesday. Place non competitive bid on Wednesday for Thursday auction. Just have a tickler for every Wednesday to repeat the process
That just seems like a lot of trouble to try and shave a few percentage points here and there. Besides, comparing the T-Bill rates here:
https://www.treasurydirect.gov/auctions/announcements-data-results/
…with something like Schwabs high-yield MMF:
I am just not seeing an actively managed approach as making any difference. I would think most people want an emergency fund that they can “set and forget”.
I do think your strategy would be perfectly fine for a bond allocation portion of an overall portfolio.
Thank you for the clarification. The Treasury I’m looking at is also from Vanguard so I guess it is also a fund. Thus, I believe it is easily liquidated.
All of those are liquid funds, as is cash. Spread the funds between them. Some cash in you bank for the easiest and quick access. Then some in the MMA and some in Treasuries. Most likely you won’t need it all at once and you won’t have to dip into your ITA or securities.
Interesting.Thank you. I’m not familiar with those. I will look into it. Do you get taxed at the regular rate for each T bill every year (federal)? I’m more of a set it and forget it investor. When I started listening to Clark in the 90’s, he recommended dipping a toe in with index funds, Star fund, and target funds so that’s what I did, thankfully. I still own them and they’ve created comfort for me all these years later, not to mention the I bonds I bought on his advice that are still earning mega interest!
Ah, the common sense approach. Good idea. Thanks.
Federal tax rate on interest but NO state tax on interest. I live in a state with a fairly high state income tax rate and try to reduce income subject to state tax. Vanguard provides info during tax season of how much of the money market interest is exempt from state income tax. I still maintain a mmf with Vanguard for emergencies in addition to my Tbills positions.
I guess what I should have asked is whether your taxes are classified as capital gains or not.
I live in a state with high state income taxes. All the interest in T bills is exempt from state taxation. I have a fairly substantial portfolio and the extra work is worth it for me.
| butler
October 10 |
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That just seems like a lot of trouble to try and shave a few percentage points here and there. Besides, comparing the T-Bill rates here:
https://www.treasurydirect.gov/auctions/announcements-data-results/
…with something like Schwabs high-yield MMF:
Money Market Funds
Make your cash go further with a Schwab money fund. Choose from Schwab’s suite of high-yield cash management solutions.
I am just not seeing an actively managed approach as making any difference. I would think most people want an emergency fund that they can “set and forget”.
I do think your strategy would be perfectly fine for a bond allocation portion of an overall portfolio.
If I understand your question, all the interest on short term T bills (less than one year) are interest - not capital gains. T bills are zero coupon instruments. For example, you buy a $1000 4 week T bill for $950 at auction. On maturity, you get back the $950 + interest of $50.
Since the election, I’m staying more in money markets / SGOV rather than bonds. T-Bills are holding up, if inflation is perking up the Fed won’t go much below 4%, and high yield savings rates will be acceptable to me. But, if the Federal budget deficit continues to rip (due to the continuation and expansion of tax cuts) the increased Federal Treasury issuance will keep long-term interest rates high. Oh, this will keep mortgage interest rates high, that’s why they are going up… they track the 10 year US Treasury pretty closely. US 10-year was 3.7% on 9/18/2024, now it’s 4.27%… so someone’s mortgage just went up, and a bond investor had a loss on a mark-to-market basis.
And if longer term interest rates go up, bond values go down. That’s just how present-value math works. If you have an old bond, no one will pay you full value if rates are now higher… the price gets cut by the market to exactly compensate for the change in bond and coupon Present Value.
Treasuries themselves are generally considered liquid, and buying a Treasury fund through Vanguard should provide good liquidity as well. Since you’re looking at a fund, you’ll have the benefit of easy access to your cash, much like your current MMA.