As you reach for a reasonable return on your money, you will be required to take more market risk (seeing the value of your account fluctuate daily). Do not let this scare you. Inflation risk is shrinking your money every day it sits in the bank. Understand all types of risk as you select where to place your savings that is there to deal with emergencies and any type of big ticket purchase or vacation.
Monitor the economy and interest rates as you decide where to keep your savings. There may be times where a money market fund or a bond index fund would be your best option. Choose wisely based on getting a positive real return (return after inflation) on your money. Here is one way to look at it. If you can get 4% in a money market fund, go there. If not, consider a bond index fund.
Here is a bit of advise for those of you who store money at home in a sock drawer, a safe, in the freezer, etc. You are taking multiple risks with that money. You are taking event risk. Something bad could happen to include a tornado, a burglary, the mischief of an animal or child, etc. You are also taking inflation risk. That money is shrinking in value by the minute. Get that money out of the home!
Here is a list of places where you could put your emergency money. You can go to vanguard.com to learn more.
I have taken information shown below from the Vanguard website. You can go directly to vanguard.com and do your own search of these funds to verify what you see below. I encourage you to educate yourself on all of your options and select the right option that fits your goals, risk tolerance and time horizon. The risk level you see ranges from a low of 1 to a high of 5. You make the call.
Risk Level: 1
Short-Term Bond Index Fund
This index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities from one to five years. Reflecting this goal, the fund invests about 30% of assets in corporate bonds and 70% in U.S. government bonds within that maturity range. A key risk of the fund is the fact that changes in interest rates can eventually lead to a decrease in income for the fund. Investors with a short-term savings goal who are willing to accept some price movement may wish to consider this fund.
Risk Level: 1
Inflation-Protected Securities Fund
This fund is designed to protect investors from the eroding effect of inflation by investing in securities that seek to provide a “real” return. The fund invests in bonds that are backed by the full faith and credit of the federal government and whose principal is adjusted quarterly based on inflation. In addition to typical movement in bond prices, income can fluctuate more in this fund because payments depend on inflation changes. Investors with a long-term time horizon may wish to consider this fund as a compliment to an already diversified fixed income portfolio.
Risk Level: 2
Total Bond Market Index Fund
This fund is designed to provide broad exposure to U.S. investment-grade bonds. Reflecting this goal, the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues). As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease-pricing the fund’s NAV lower. Because the fund invests in all segments and maturities of the fixed income market, investors may consider the fund their core bond holding.
