Should Ferisa and her husband move their emergency fund from a money market account to a short-term bond fund? Dave doesn't like this idea, and he explains the reasons why.
QUESTION: Ferisa and her husband are about to complete their fully-loaded emergency fund. They keep it in a money market account. Recently, they heard about short-term bond funds with a higher interest rate than their money market account. Ferisa asks if it’s okay to move half of their emergency fund into one of these bond funds. Dave doesn’t like the idea at all.
ANSWER: Absolutely not! Under no circumstances should you do something like that. An emergency fund is not an investment. You’ll never build wealth and get rich off your emergency fund. That’s not what it’s there for.
An emergency fund is insurance, not an investment. It’s a rainy day fund, and its whole purpose is to sit there safe and wait until life throws unexpected expenses in your face. Think about it this way. Insurance costs you money to protect things that make you money — like your home. It’s also there to cover things you otherwise would not be able to afford. When you have an emergency fund in place, you don’t have to dip into your 401(k), your IRA, or go into debt. Why? Because your emergency fund provides insurance against those kinds of things.
Let your emergency fund sit right where it is, Ferisa. Besides, it’s a really bad idea to buy bonds in an environment where interest rates are increasing. Bonds have an inverse relationship to interest rates. So, as interest rates climb you’ll lose out if you’re playing around with bonds.