Short-Term Savings in Short-Term Bonds

[Wister5]

Sure...a cedar roof looks cool until you realize what it will cost to replace one. Ugh. We will need to replace ours in the next year, or two. We have a portion of the cost ($10k) set aside and need a place to park it. I was thinking of short-term bonds, like Vanguard's VFSTX.

Thoughts?

Where would you place it?

[jfoxcpacfp]

MMA or CD, definitely not short-term bonds.

[Wister5]

Thank you for taking the time to reply, jfoxcpacfp. Can you elaborate? VFSTX seems to perform slightly better than an MMA.

[Hatton]

Bonds will probably lose some value over the next year as rates increase.  MMF- VMMXX

[jfoxcpacfp]

Wister5 wrote:

Thank you for taking the time to reply, jfoxcpacfp. Can you elaborate? VFSTX seems to perform slightly better than an MMA.

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Yes, it has performed slightly better than an MMA. However, performance in the short term is not the priority - it is safety and liquidity. You have no guarantee that VFSTX will continue to perform until you need the funds. It is an investment and you would be speculating A MMA is much more predictable, and that is what you need in the next few years. The risk of loss is just not worth the minimal growth you will (hopefully) get.

[triad]

the price you pay for the higher return is higher risk.  I think an online savings account is your best bet.  rates are around 1.3% right now with essentially no risk.

[Zaphod]

If anything I would expect (though cant say for sure ofc) bonds to under perform if not outright lose value over that time frame. Yes a short term bond will do less so, but why risk it if you have a near term need and you can get MM funds at decent prices.

[jz]

Must you stick with cedar?  the new metal roofs look great.  Choose a CD for your time frame.

[Wister5]

Yes. The neighborhood covenant dictates all building materials.

 

[Zaphod]

Wister5 wrote:

Yes. The neighborhood covenant dictates all building materials.

 

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I understand the idea but thats kind of crazy. If someone is dictating a choice for purely aesthetic reasons, and its more expensive and less durable, I would want some kind of compensation above the baseline cost. I know its crazy, but just couldnt stomach it, so I stay away from any cc/r type neighborhoods.

[Wister5]

 

It is a bit of a pain. However, having the covenant does keep new housing standards in line with the existing homes and prevents homeowners from doing anything too crazy. (Like paiting their house purple.) You have to take the bad with the good.

[Molar Mechanic]

I hesitate to go against the financial pros here, but in my own life, I think the question has to be asked about what the consequences of the worst case scenario happen and how likely is it to happen.

If that money is invested, and loses some, then what are the consequences?  Postpone new roof and clean up leaks everytime it rains, postpone new roof knowing that the current one is ok, but due for replacement, pull a little bit of money from a separate account, or city condemns the property and you have to move?

If the consequences are small, and the odds are good of investment growth, I go for the growth.  If the consequences are large, then I don't.

[VagabondMD]

Molar Mechanic wrote:

I hesitate to go against the financial pros here, but in my own life, I think the question has to be asked about what the consequences of the worst case scenario happen and how likely is it to happen.

If that money is invested, and loses some, then what are the consequences?  Postpone new roof and clean up leaks everytime it rains, postpone new roof knowing that the current one is ok, but due for replacement, pull a little bit of money from a separate account, or city condemns the property and you have to move?

If the consequences are small, and the odds are good of investment growth, I go for the growth.  If the consequences are large, then I don’t.

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The potential benefit is small (2.0% vs 1.35%), and the potential of small loss of capital in addition to the hassle of capital gains/losses tracking makes this one not worth the effort.

Let's use the ishares short-term core bond fund (ISTB), current yield of 2.07%, and assume that there is no fluctuation in the principle or transaction cost, and you hold the $10,000 for six months. If you place the money in the Ally account, at the end of six months, you will earn $67.50, and if you place it in the ISTB ETF, you will earn $103.50 (simple interest). Or you could use the SUB (ishares short term muni bond ETF, yield 1.39%), and get a tax free $70 or so. Is it really worth the small risk and hassle for less than $50?

[Molar Mechanic]

At today's interest rates vs bonds, probably not, especially when you consider you are going to lose up to 40% or more of any gains to taxes.

IMO, one benefit of being high net worth is having a massive safety net.  I personally would throw it into a total stock market ETF, then try to use a different $10,000 (reduce what I would have put into a taxable investment account) to pay for the new roof and delay selling the investments.

If the dollar amounts were greater, and the penalties higher, then that changes things.  Personally I held my mortgage down payment in stocks until the week I made an offer.  If they had tanked, my down payment might have been smaller.  If things melted down, then I potentially would have had to postpone the house purchase keep living in the completely adequate house I was renting.  In the end, I made a little money, as I figured I probably would.  Once I went under contract, that money went to a FDIC savings account, as the penalty for not having the money became far greater.

My downside was manageable, and the odds were on my side.  I don't tend to be one to see "pots" of money, as money is completely fungible.  I also wouldn't give this advise to my support staff or most of the people I grew up with.  Their ability to manage a small loss is not the same as most WCI readers.