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Strategies to Save

When Is It Okay To Tap My Savings?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Most personal finance advice preaches the gospel of saving, admonishing you to resist the temptations of restaurant meals, shopping sprees and other extravagant expenses. Sock away as much money as you can bear in some sort of savings product, they write. Prepare for the worst!

Let us reassure you that all those nights you suffered from FOMO and dined on leftovers were worth it. We’ve assembled a panel of expert financial planners to weigh in on when and why you should tap your savings, and how to do so intelligently, without derailing your plan for financial security.

You just lost your job

“Short-term, emergency savings are perfect for using when a need arises, but should really only be used in true emergencies such as a job loss,” said Jason Speciner, CFP at Financial Planning Fort Collins based in Fort Collins, Col. And while a week or two of “funemployment” may sound appealing at first, that hoard of pelts you collected in Red Dead Redemption 2 won’t go far with the landlord or your creditors.

Common sense dictates you should cut back whatever expenses you can while you’re in between jobs, but depending on how you lost your job, you may not have to rely completely on your savings to keep you afloat.

Collecting unemployment benefits

If you’ve recently lost your job, you may be eligible to collect unemployment benefits through the joint federal-state unemployment insurance program. The particulars of who can collect unemployment varies from state to state, but in general you must meet the following criteria:

  • You are unemployed through no fault of your own. (The exact definition of which depends on the state, but if you were perhaps fired for showing up to work inebriated, you shouldn’t count on collecting unemployment).
  • You worked a certain amount of time as required by the state to be eligible for unemployment, usually the first four out of the last five calendar quarters prior to the time you file for unemployment. In other words, you will have needed to be working full time for at least a year in most states.

You’ll have to apply for unemployment with your state’s unemployment insurance agency, either in person, over the phone or online. When you do so, make sure you have information such as the dates you worked for the employer, how many hours you worked, and other important details.

Check out this list of links to state unemployment insurance agencies, and also see MagnifyMoney’s detailed guide to filing for unemployment to help ensure you get all of the financial assistance to which you’re entitled.

You just got hit with a huge medical expense

Sometimes an illness or injury can take a greater toll on your financial health than on your body. A recent Kaiser Family Foundation poll found 67% of the country lists unexpected medical bills as their biggest worry when it comes to paying for healthcare, and given the thousands of dollars of debt you can rack up with even a single visit to the hospital, it’s easy to understand why.

“Life happens, and these types of expenses are why financial planners are always adamant about establishing an emergency fund,” said Rick Vazza, CFA at Driven Wealth Management in San Diego, Calif. “Without one, the cost would normally be covered by credit, and if the credit on a large expense can’t be paid off immediately, the interest charges can be significant.”

If your health insurance doesn’t cover enough of the costs to protect you from a bill you can’t afford (or you aren’t fortunate enough to have insurance in the first place), you still have some options before charging that medical bill to a credit card and potentially setting yourself up for years of debt.

How to knock down hospital bills

Getting a hefty bill from the hospital can be enough to send you in a panic, but you should avail yourself of every opportunity to lower the amount you owe before forking over a payment. In general you can:

  • Contact the hospital’s billing department and ask about its bill reduction or forgiveness policies — this will depend on the individual hospital, but depending on your income level and the particulares of your situation, you may qualify for a reduced bill.
  • Offer to pay the hospital in cash (or using a flexible spending account) — sometimes hospitals and other medical facilities will give you a discount if you’re willing to settle the bill right then and there.
  • Charge the bill to a 0% APR credit card — assuming you can qualify for one of these cards, it’s important to remember that the 0% interest only holds for a limited amount of time, so if you’re unable to pay off the money you charge to the card before the time is up, you’ll be stuck making interest payments.

Find out more by consulting our guide on how to get your hospital bill reduced and minimize the drain on your savings.

A major appliance breaks

You don’t want to get in the habit of leaning on your savings to purchase big-ticket items you could do without. But sometimes things fall apart, and if your furnace went on the fritz, you wouldn’t want to wait until your next paycheck to restore heat in your home. You could always charge the repair (or replacement) on a credit card, but make sure you’ll be able to pay off the balance by your next billing cycle if you want to avoid interest payments.

“A good rule of thumb is to dip into the emergency fund whenever the alternative would require carrying a credit card balance to pay for the irregular expense,” said Vazza.

Building a budget for repairs

One way to help soften the blow of dipping into your savings to replace a major appliance is by having a well-planned budget that includes money for such incidentals. Ditch your pen and paper, and try one the many budgeting apps available to help you track your money.

Making a budget means taking a long, hard look at how you spend and save money, which is why it’s often so unpleasant. To begin, you’ll need to determine a few facts such as:

  • How much money you take home every month.
  • How much you spend every month, both on necessities such as rent or mortgage, and luxuries like eating out, entertainment and shopping.
  • How much money you want to save monthly — not only for retirement and long-term financial goals, but also for incidentals such as major appliance repairs.

Learn more about how to use these apps and set up your first budget at MagnifyMoney’s ultimate guide to budgeting.

You need to seize a once-in-a-lifetime opportunity

Dipping into savings to seize an opportunity is more open to interpretation than the other items listed above — is it worth taking money out of your account to invest in your brother-in-law’s dating app idea? But at the end of the day this is your money (and your life), so only you can decide if an opportunity is worth spending the cash.

Consider taking a loan

Depending on the opportunity, you might find a personal loan from a bank can help you cover expenses along with dipping into your savings. Lenders (both traditional banks and online financial institutions) offer plenty of loans to help you out with the associated costs.

Of course, not even the most lenient lenders just hand out sums of money to anyone, and if you find one that does, you should run in the opposite direction — it’s probably a deal too good to be true. Some other things to keep in mind when applying for a loan are:

  • Your credit score, which sums up how big of a risk you are to lenders considering giving you a loan. The higher this score, the more dependable you look to lenders which gives you access to better loan terms such as lower interest payments.
  • The interest rate charged by lenders. This varies depending on the type of loan — personal loans, which usually aren’t backed by any sort of collateral, tend to charge higher interest rates.
  • Is there an origination fee? Some personal loans charge a fee based on a percentage of the total loan amount that must be paid upfront. For example, a $35,000 personal loan with an origination fee of 5% would mean you need to pay a $1,500 origination fee.

Read our guide to find out more about the ins and outs of navigating a personal loan.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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Retirement

Financial Independence, Retire Early: Should You Consider FIRE Retirement?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Nobody wants to spend their golden years working under McDonald’s golden arches. However, some savers aren’t content to wait for their golden years to put their feet up and stop working.

In recent years, a cohort of millennials and younger savers have adopted an approach to retirement savings called FIRE, an acronym that stands for financial independence, retire early. The FIRE retirement movement challenges its followers to view every financial decision they make through the lens of the question “does this bring me closer to or further from retirement?”

“One of the things that motivated me to become financially independent was watching one of my coworkers collapse and almost die at his desk,” said Kristy Shen, a FIRE blogger at the website Millenium Revolution. “I now realize that your health is not worth trading for money.”

By advocating a laser focus on retirement goals and building a nest egg early, FIRE asserts that workers can reclaim decades otherwise lost to status meetings and sad desk lunches by retiring for sooner than their 60s.

What is FIRE retirement and how does it let you retire in your 30s?

The goal of FIRE retirement is to make you financially independent — no paycheck, no boss — with sufficient assets saved to retire decades earlier than most Americans. While many of the FIRE movement’s practitioners talk about their lifestyle with the zeal of converts, there’s no official list of rules or tips you have to follow.

Read through the FIRE Reddit page or one of the many blogs detailing methods people have adopted to achieve FIRE and you’ll see that it’s easy to get lost in the minutiae of advice and warnings. But at the end of the day, FIRE retirement boils down to having the initiative to plan out how much money you need to retire at a target age of your choosing, and the discipline to build a nest egg by cutting costs and boosting income.

How much money do you need to retire early with FIRE?

Calculating how much money you need to save before you can leave the office forever can be difficult with a traditional retirement. It’s even tougher to plan for a FIRE retirement, given that retiring in your 30s would mean anticipating around 50 or more years of expenses. Add to that the fact that you can’t start collecting Social Security until 62, or withdraw money from an IRA account without a penalty before age 59 ½, and you begin to understand the daunting challenge facing anyone hoping to retire before middle age.

However, the basic questions you need to ask yourself for FIRE retirement and traditional retirement remain the same. Determine how much annual income you require to maintain your anticipated lifestyle in retirement by figuring out how much you’ll spend on everything from groceries to medical costs.

If you were aiming for a traditional retirement in your 60s, you would add up your estimated annual expenses and multiply this figure by 25, which would give you a good goal for the amount you need saved in a portfolio of stocks and bonds.

Why 25? In 1999, three economics professors from Trinity University in San Antonio conducted a study of the stock market and determined retirees should have a portfolio that large to allow them to withdrawal 4% the first year of retirement, and increase this amount each year to match inflation. Based on the historical returns offered by markets, retirees could live comfortably for at least 30 years with this strategy.

But if you retire at age 30, you won’t want to start looking for a job as a 60-year-old because your portfolio ran out of funds. FIRE practitioners set a goal of amassing far more than the 25 times their annual retirement expenses to help increase the odds they’ll remain financially independent for the long haul. “The 4% rule is still a valid foundation, but that doesn’t mean we’re just going to blindly follow it regardless of what happens,” said Steve Adcock, a FIRE blogger who runs the website ThinkSaveRetire.

Ultimately, the particulars of each person’s FIRE retirement plan will reflect both their means and saving priorities.

“Not everyone is going to be able to retire at 35,” said Adcock “But I do believe that early retirement is more achievable by more people than they [might] realize. The average retirement age is something like 62 or 65, so if you retire at 58, guess what? That’s early retirement.”

A few FIRE scenarios

To give an example showing how demanding attaining FIRE retirement can be, a person who estimates their annual retirement expense at $45,000 and who wants to save 30 times that amount would need to accumulate $1.35 million. Assuming this person started earning an income at age 21 (to be generous), they’d need to save approximately $71,000 every year to reach her target by age 40.

There are different methods used among FIRE practitioners. Some members of the FIRE community, such as blogger Mr. Money Mustache, stick to what’s known as “lean FIRE,” where annual expenses are kept below $40,000 a year. Others, such as the writer behind the blog Physician on Fire, practice “fat FIRE,” where frequent travel, meals out and other expenses total around $80,000 or more a year.

Type of retirementHow much you’ll spend a yearHow much you need saved
Lean FIRELess than $40,000$1 million or less
Fat FIRE$80,000 or moreAt least $2 million
Traditional$50,000*$1.25 million

*Number based on the latest data from the U.S. Bureau Statistics showing the average annual expense of households headed by those 65 years and older

A recent Harris Poll survey of FIRE advocates conducted at the behest of TD Ameritrade found 33% of respondents were targeting savings between $1 million to $2 million, reaching a middle ground between the amounts listed for the lean and fat versions of FIRE retirement. On the extremes, more people (37%) aimed for more than $2 million than those (31%) with more modest goals of below $1 million.

How is it possible to save so much money so quickly?

Given the ambitious goals of FIRE practitioners, unless you’re already pulling down a big paycheck, saving 15% of your income each year isn’t going to cut it. According to the FIRE blog FinancialSamurai, the ideal savings target is 50% of your annual income, although with the concession that anything more than 20% is acceptable.

Given that the median household income in America is $61,372, according to the latest government data, one may be able to understand why FIRE retirement has been criticized as an option only available to people who are already quite privileged.

But regardless of what income FIRE retirement hopefuls start with, saving the money they’d need to drop out of the workforce in their 30s or 40s means living well below their means. The ways in which they accomplish this may sound familiar to anyone who’s read a personal finance article about cutting costs.

These include:

  • Minimizing housing needs and expectations — housing is most people’s single largest expense, so securing a lower mortgage or rent can provide dramatic savings.
  • Biking instead of driving (when feasible) to save on fuel costs
  • Avoiding unnecessary fees of all kinds, such as monthly maintenance fees on checking accounts
  • Limiting or eliminating all spending on meals out
  • Unsubscribing from gym memberships, online services or other recurring entertainment costs you won’t absolutely need

Let’s take a closer look at housing, which accounts for more than 30% of all annual expenses for most Americans. People aggressively pursuing FIRE retirement will seek out low-cost housing in high cost-of-living areas. By sacrificing comfort, they reap the benefits of the higher salaries available in such areas. Once they’ve saved enough money to pull the trigger on early retirement, they move somewhere with a more affordable housing market in order to stretch their savings.

With FIRE retirement, the money you save isn’t just sitting in a bank account. Even the highest-yielding savings accounts won’t earn enough money to keep you solvent during your decades of retirement. Instead, most FIRE adherents funnel their cash into the stock market, particularly low-fee index funds. The idea is to place your money somewhere it can reliably grow without the cost of brokerage fees that cut into your retirement income.

Money from stocks and bonds usually make up the largest share of a FIRE adherent’s passive income — that is, any income they can collect without having to exert much effort or time. Since early retirement is funded by passive income, FIRE forums and blogs are filled with debates over the wisdom of investing in real estate, what specific funds in the stock market to target and other ways to earn passive income.

Don’t get burned by FIRE

Pursuing early retirement with FIRE requires a specific mindset: you must be willing to sacrifice significant amounts of discretionary spending in the short-term in order to help you save enough to become financially independent at an early age. Beyond possessing the fortitude to pass up on those kinds of opportunities, a FIRE lifestyle comes with nontrivial risks you need to think through.

Because you’re dropping out of the workforce during some or all of your prime earning years and trusting a huge part of your financial security to the stock market, you stand to lose a lot if the economy tanks or markets melt down. For example, what if a financial crisis causes rampant inflation, which would devour the value of your portfolio at a much higher rate than you accounted for? Can your portfolio survive a stock market crash? What if you develop a chronic illness or suffer some other health catastrophe during your 50-odd years of retirement that completely depletes your savings?

FIRE practitioners would respond that pursuing early retirement means embracing flexibility, and that any damage done to a nest egg can be countered with adjustments in lifestyle.

There’s also the risk of obsessing over your FIRE retirement goal so much that you lose sight of why you want so much free time in the first place.

According to Adcock, “people spend years and years trying to get to [financial independence], and the struggle is part of the appeal.” However, he added, “if there’s nothing else in your life that you’re going to continue to strive for,” he added, “then [achieving FIRE] is very underwhelming.”

The bottom line on FIRE retirement

The dream of retiring early remains a fantasy for millions of workers for a reason — it’s extremely difficult to achieve. However, difficult does not mean impossible. FIRE retirement works because the idea underpinning it — you can retire at any age you want, so long as you have the money — remains a solid one.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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Banking

What should you do if you get fake money from an ATM?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

There are at least 41.6 billion individual Federal Reserve Notes — more commonly known as dollar bills — in circulation, and about 0.0093% of them are counterfeit.

If you happen to receive fake money from an ATM, consider yourself both very special and probably out of luck. Special because the odds of you actually getting fake currency from an ATM are infinitesimally small, and probably out of luck because there’s very little chance you’ll be able to trade in the fake bills for the real McCoy.

It’s hard to exchange fake money for real cash

Getting counterfeit money from an ATM, particularly if the ATM is from a reputable bank and not a graffiti-covered disaster in a shady alley, can cause justified outrage. After all, that $100 you just got has been deducted from your account, and as far as the bank’s concerned the money’s been withdrawn and is now your problem.

Marching up to a bank teller and waving the fake money in his face doesn’t guarantee you’ll get reimbursed. “How would [the customer] prove that they received that bill from the [bank’s] ATM?” said Nessa Feddis, senior vice president and deputy chief counsel at the American Bankers Association.

Banks employ machines to check the authenticity of all the currency they receive before placing it back in circulation via teller or ATM, so an instance of someone getting fake money directly from a bank would be considered a rarity.

“It’s pretty remote that banks would be giving customers counterfeit bills because they check them,” Feddis said, though she still acknowledged it as a possibility. “Something could fall through the cracks, but even then the onus is on the person who has the counterfeit bill to prove that they didn’t create it themselves, that they received it from the bank and they didn’t receive it from somebody else.”

Don’t expect the government to be any better at reimbursing you for the fake money you’ve received. In its instructions on how to return a counterfeit bill to the proper authorities, the Treasury Department notes “there is no financial remuneration for the return of the counterfeit bill, but it is doing the ‘right thing’ to help combat counterfeiting.”

You probably won’t like the fact you have to take a loss on counterfeit money, but at least you can take solace in knowing that nobody else will get burned by that particular forgery in the future.

Insurance to the rescue?

While neither the bank nor the government are a good bet when it comes to getting your money back, salvation can come from an unlikely source: homeowners or renters insurance. Some policies allow you to claim receiving counterfeit money (the exact limit to how much you can claim depends on your individual policy).

How to spot fake money

Given the heartbreak that comes with receiving counterfeit money from an ATM, you may want to pay it forward and learn how to spot fake money to avoid taking bogus bills in other transaction (such as getting change from a retail store).

You may have seen clerks and cashiers occasionally scratch at a bill you’ve given them with a pen meant to detect counterfeit bills, but the federal reserve claims these tools aren’t always accurate.

Fortunately, each denomination of paper money contains security features you can spot to help you determine if the bill in your hand is genuine, so long as you know what you are looking for. The $100 bill for instance contains:

  • A security thread (visible when holding the bill to the light) immediately to the left of Ben Franklin’s head with “100” and “USA” alternating in a line.
  • A 3-D security ribbon woven into the bill down its center. When you rotate the bill side to side, you should see “100”s move up and down. When you tilt the bill back and forth, these “100”s will move side to side.
  • A color-shifting image of the Liberty Bell in the copper inkwell at the bottom of the bill, visible when holding the money to the light and tilting it up and down.
  • On the right side of the bill a faint watermark portrait of Ben Franklin should be visible when holding the bill to the light.
  • The “100” on the bottom right corner of the bill should change color when tilting back and forth under the light.

A more detailed breakdown of each denomination security features can be found at the website for the U.S. Currency Education Program, a federal government entity charged with educating users of U.S. currency about the ins and outs of paper money.

What happens if you pass the buck?

Suppose for a second you lack any sort of moral compass or conscience—what’s the worst that could happen if you just try and spend that $20 you know is counterfeit? The answer is up to 15 years in prison and as much as a $15,000 fine, according to the law.

Instead, if you receive counterfeit money from an ATM, the first thing you should do is go to the bank, which will take care of it from there. If you can’t (or simply don’t want to) go to the bank, the Treasury Department recommends against confronting whomever passed you the fake currency in case doing so would place you in personal danger. You also should:

  • Not return the bill to the passer
  • Try and delay the passer if possible
  • Observe as many details of what the passer (and any of his or her friends) look like and even write down their license plate should the opportunity present itself
  • Contact the local police or local Secret Service office
  • Write your initials and the date on the white margins of the bill
  • Not otherwise handle the bill and instead place it in some sort of container, such as an envelope
  • Hand it off to a Secret Service official or police officer
  • Mail the bill to your local Secret Service office if you can’t make direct contact with a Secret Service official or police officer

If that sounds like a pain… well, it is. But while you lose money, you gain the satisfaction of getting to play Elliot Ness for a day.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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