How to Use Municipal Bonds for Emergency Savings (Plus: How to Bake Crescent Rolls)

The older I get, the more I realize that I don’t actually know how to do things that I thought I knew how to do. Can you relate? There always seems to be something that your friends or family members are doing, so it must be pretty easy…right? Well, this past month I learned that for me, two of those things are 1) baking crescent rolls, and 2) how to use municipal bonds for emergency savings.

Baking Crescent Rolls

Let’s start with the food. This morning, I decided that I was going to make my kids mini chocolate “croissants”, aka Trader Joe’s crescent rolls with semisweet chocolate chips inside. I popped open the can, separated the triangles, and laid them on a baking sheet. After looking back and forth between the picture of the baked crescent rolls and my little triangles a few times, a wave of disbelief washed over me. I had absolutely no %&#@ing clue how to roll the dough.

Was this a big deal? No, it was not. Could I have looked up “how to roll crescent rolls” on YouTube? Yes, absolutely. But I’m trying to trust myself more and not research how to do something for hours on end. So folks, I just went for it. I sprinkled on some chocolate chips, rolled them over twice, curved the edges inward, and plopped them in the oven.

The result was, ah, what you would expect. Please be kind:

Luckily, the only mistake I made was not rolling them enough times. However, they were delicious! And much more importantly, my kids got breakfast.

And as a bonus personal takeaway, I finally learned how to do something that was actually pretty easy to execute, but I had just never tried before. Which leads us to the next topic: municipal bonds!

Learning About Municipal Bonds

So let’s talk money. The very first financial post I published on this blog was about where to put your emergency savings. I reviewed regular savings accounts, high yield savings accounts, and even certificates of deposit (CDs). But do you know what was missing, and what a young colleague pointedly asked me about? Municipal bonds.

And once again, I needed to pause and acknowledge my ignorance. Superficially, I knew that I was supposed to have bonds in my investment accounts to balance out the volatility of stocks. While that’s true, that’s not what bonds are. That’s just a reason to have them. Additionally, that’s just talking about all bonds in general, not municipal bonds specifically.

So if you’re like me and need an actual definition, here it is:
A municipal bond is a loan you give to a city government, utility company, or similar institution to fund things like infrastructure projects. In return, they will give you a predetermined number of interest payments for a specific period of time. At the end of that period, you get your original loan amount back – on top of the interest payments they gave you!

As I mentioned above, municipal bonds are just one type of bond. So be sure that you’re looking up municipal bonds when you’re researching for the purposes of your emergency fund! Other bond funds may have similar safe returns, but you may be taxed on your earnings.

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Why Municipal Bonds Are Good for Emergency Savings

So now that I actually know what municipal bonds are, I’m much more comfortable recommending them to you! Municipal bonds are a great place to store your emergency savings for three reasons:

  1. You can potentially get a much higher interest rate on bonds than “high-yield” savings accounts. For example, the Nuveen Intermediate Duration Municipal Bond Fund has a 1-year return of 3.5% vs Ally Bank’s high-yield savings rate of 0.60%.
  2. The interest earned on most municipal bonds are exempt from federal, state, and local income tax. This is not true for interest earned on savings accounts. This is also not true for all types of bonds, just municipal ones specifically.
  3. They experience very little volatility. This means it’s very unlikely you will lose any money on your investment.

Finally, an unfounded fear I had was that it would be hard to get my money when I needed it. It turns out that was completely false! It takes the same amount of time as it would to transfer from an online-only savings account: approximately 2 business days.

That said, I still recommend setting aside a portion of your emergency savings in a regular account you can access immediately. As an example, we have 75% of our current emergency fund in a municipal bond index mutual fund, and 25% in a regular savings account.

Things to Consider Before You Buy Municipal Bonds For Emergency Savings

As I mentioned above, I’m very happy that we decided to use municipal bonds as an emergency savings vehicle. However, there are a few things to consider before you do the same.

Remember: Bonds Are Not Savings Accounts

Despite me waxing poetic about bonds, I want to be very, very clear about something: bonds are not the same thing as an FDIC-insured savings account. When you invest in bonds – in particular, municipal bonds – it is very, very likely that you will get your investment back plus the interest payments you’ve been promised under the bond. However, it is not guaranteed.

On the other hand, the money you put into a savings account is guaranteed up to $250,000, assuming it’s insured by the FDIC. And it should be, assuming you bank with a reputable bank or credit union.

In researching for this section, I was pleased to see that the FDIC themselves spell this out very clearly on their website!

Research All Your Options

There are many different ways you could purchase municipal bonds. You could buy individual ones (just like stocks), or you could buy a mutual fund of municipal bonds (again, just like stocks). These are available at most banks or brokerage firms. Frankly, I think the simplest thing to do is to buy a municipal bond mutual fund from your brokerage firm of choice, then put a portion of your emergency savings in that fund.

For us, we chose to buy the Nuveen municipal bond mutual fund I mentioned using Fidelity. It’s got a decent return rate, holds companies that we’re OK investing in, and has relatively low fees. If you’re wondering how we determined it had a decent return and low fees, we compared the fund to other similar mutual funds.

A quick note here: we have a financial advisor, and we walked through several different funds with him before settling on this one. So whether you pay someone to help you, do it on your own, or get your nerdy finance friend to help you, please comparison shop before buying!

What You Can Do

The shared lesson here is that you don’t know what you don’t know. But once you figure that out, the solution might be easier than you think! So my challenge to you is to identify something in your life that you think you know how to do, and find out if you can actually do it. And if you can’t, start learning!

If you’re struggling to think of something, here are are few other examples:

Can you think of more? Drop me a line at maddie [at] orangejalapenos [dot] com!

Why I Put My Emergency Fund in Municipal Bonds

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