Emergency Fund in Bonds?
Ryan asks what Dave thinks about putting his emergency fund in bonds. Dave thinks it's stupid.
QUESTION: Ryan on Twitter asks what Dave thinks about putting his emergency fund in bonds. Dave thinks it’s stupid.
ANSWER: Stupid idea. It’s an extremely stupid idea, and here’s why: Bond values—bond prices—go down as long-term interest rates go up. Long-term interest rates are ticking up right now. That’s mortgage rates, as an example. They’ve moved up a quarter of a percent. As they move up, the value of your bonds goes down. If the interest rates spiked, you could lose half your emergency fund.
We do not put our emergency fund in things that are at risk. It is not there as an investment. It is there to protect other things that are an investment and to protect your life. You keep your emergency fund in something simple like a money market account where there’s no penalty to take it out early. We’re not trying to make money with the emergency fund. The emergency fund is insurance. It’s not an investment.