hello folks.

You were so helpful with my municipal bond question that I am back with more. I'm stuck regarding what to do with my money right now and looking for advice.

My current situation is very good. I have a pretty high income.
- Almost maxed out my 403(b) for the year
- Income too high for Roth
- I have a $15,000 emergency fund with Vanguard in a bond fund
- I also have $12,000 in a side fund on my life insurance policy that earns 4% (the max is $16,000).

Now I've got a bunch more money sitting around that I want to save. I'm hoping to have a child sometime in the next year, and I'm leaving my job at the end of June and will have time to travel and have fun, so I want to have a bunch of money stashed away, but it has to be liquid.

With the current situation of low interest rates I'm just kind of stuck on what to do with the money. I'll definitely max out the side fund, but I think I lose that when I leave my job, so I will have to find a place to put that $16K. I'm not sure if I like the bond fund at Vanguard so far, my idea was to put the money in something with extremely low volatility but it seems like putting it in an interest guaranteed account of some sort would be better. My opinion is colored because last I checked, the bond fund was running at a slight loss from when I opened it.

Also can I do the $5K rollover traditional IRA to Roth this year again?

All the highest interest accounts I can find are Rewards Checking accounts with maximums usually $15K or $20K and requirements like direct deposit and debit transactions. Do I need a money market account, probably earning less interest but at least it would still be very liquid, right? The only other option coming to mind is laddering some 3 to 6 months CDs or something. Tell me what ideas I'm missing.

p.s. it may be germane to the situation to mention that I have over $100K in loans from my graduate education, most of which I'm paying 4% on, then maybe $40K of which I'm paying 2.75% on. Right now I pay $1800 monthly on the loans and I intend to continue doing that, wasn't going to step up the payments at this point because of wanting to build liquid savings for the next 6 to 12 months. I have no mortgage at this time or any other debt aside from these Staffords.

What exactly is the "side fund"? I'd like to know more about that.

As for any cash you expect to need in the next 1-2 years it is an easy decision. It needs to be in cash at an online savings/money market account to earn the best rates (Ally, ING Direct, Everbank....). You might be able to ladder into some short term CDs, but online savings rates may still beat them.

Once you have adequate liquidity and know your cash needs for when you want to travel / have a baby the excess cash needs to go into investments. And not bond funds, ironically I'd consider bonds far more risky than stocks for long term savings.

The rates on your student loans are pretty low. If you are worried about liquidity I would save the cash and not pay extra on the loans. But, if you are putting long term savings into a bond fund earning less than 4%...its a no-brainer to pay down the 4% loan with that excess cash.

Hard to beat a 4% guaranteed short-term return. 100k is a large balance... if you can whittle away at it before it gets larger, I'd say do it. It's costing you about 4k/year... I doubt any investments will give you that kind of return to compensate.

That's a interesting discussion we could have!

I think bonds are fine for the next couple of years, and as long as you keep the duration short. If you don't know how to select a fund with a short duration then I'd avoid them. Also, individual bonds held to maturity are fundamentally different than bond funds and could be quite safe right now, though probably not a great deal.

While I stick almost exclusively to index funds/etfs for equities, I am much less convinced that indexes make any sense when it comes to bonds. Common stocks are all pretty much the same and indexing boils down to defining some characteristic like market cap and then buying all the stocks that meet that criterion. Every bond though is different. Constructing an index means selecting a particular portfolio of bonds that the manager decides is representative. That decision is called active management.

The bond fund I have is called VBIRX, it has "Short Term" in the name so I'm pretty sure it's short term. The expense ratio is only 0.11% so I don't think it can be very actively managed. The 1 year yield has been 3.42% and since inception, 3.89%, so that seemed pretty good to me, unless I'm interpreting the fund info wrong.

It's not easy to access though so I can definitely see the appeal of putting it in one of the "high yield" accounts, or at least putting excess funds into a more accessible account.

I don't know if I fully understand the side fund but apparently it's a part of my life insurance policy with Prudential and it makes 4% interest, so whatever it is, I like it. The maximum amount I can put into it per year is calculated somehow from my salary, I think.

That fund has a duration of 2.7 years. That roughly means that if interest rates in general go up by 1%, the value of your holdings in that fund will go down by 2.7%. That is not bad but is on the longer end of short term funds, not a bad thing but it partly explains why it has done so well compared to its peers lately. I would have no qualms about holding that fund for money you'll need in 2-5 years.

Be careful...don't get returns and yields mixed up. The 1 year return has been 3.42% and since inception is 3.89%. The actual yield (interest paid to you) is only 0.76%. The reason the return has been so good is because this fund is 70% US Treasuries which are in the middle of a major bubble (records highs). If and when interest rates begin to rise the return will be negative.

Right now, I'd choose 0.84% in a bank account over 0.76% in a bond fund that has the potential to lose money when interest rates rise. I wouldn't necessarily sell out of the fund, I just wouldn't commit any new short term money to it.

True. But the duration let's you quantify "the return will be negative." The OP has earned 3.42% the past year. If rates went up tomorrow by a full percent then about 2.7% of that would theoretically evaporate and the net return would be about 0.72%. If we were talking about as much as $10000, the difference between that at a guaranteed 0.84% would be 0.12% or about $12/year. It is hardly worth worrying about, especially since the probability of the probability of rates going up a full percent in the next couple of years is almost negligible. The Fed has fairly good control over short rates and has pledged low rates through 2014. I suspect the smart managers at Vanguard have pushed the duration on this fund out to the high end to take advantage of slightly better yields and a further increase in price in response to Operation Twist. Even though that action has left the headlines, it is still very much happening.



@Bill, I think your points are valid, but I also think that a little situational awareness right now suggests that a short term bond fund is a very safe place and offers much better potential upside than a bank account without much corresponding risk.

That's what I have been debating personally for my emergency fund for the past few weeks...still looking for that magic yield/duration combination.