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Where Should You Put Your Emergency Fund?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

There are three key factors to consider when deciding where to keep your emergency fund: yield, liquidity and cost. Choosing a deposit account to hold your emergency fund that strikes a balance between these elements can help you maximize your savings and provide easy access to the money when an emergency strikes.

Emergency fund basics

An emergency fund is a cushion that protects you against major financial shocks. It’s not for paying regular expenses or even small, unplanned costs. As the name suggests, it’s for emergencies — things like unemployment or major, unexpected medical costs.

Your emergency fund exists to prevent you from having to take on expensive debt when faced with large, unexpected expenses. Whatever type of deposit account you choose for you emergency fund, it needs to provide easy access, a decent return on your money and zero extra costs:

  • Yield: Choose an account with a high interest rate that provides you with a decent rate of return on your money. Keep in mind that your emergency fund isn’t an investment — it’s an insurance policy.
  • Liquidity: You should keep the money in a relatively liquid account so that you can draw from it in an emergency. Highly liquid accounts give you immediate access at no cost, whereas less liquid ones take time to free up funds.
  • Cost: Any extra costs eat into your fund and diminish your returns. Choose an account with zero maintenance fees to help preserve your funds.

How much do you need in your emergency fund? A good rule of thumb is to put away the equivalent of three to six months of living expenses.

Keep your emergency fund in a high-yield savings account

A high-yield online savings account is a great option for your emergency fund. Online banks lack branch locations, which helps lower their overhead costs. This helps them offer higher APYs and lower fees than traditional financial institutions.

Online savings accounts offer varying levels of access to your money. Some offer debit cards and even checks, which let you make payments without delay. Others limit your ability to deposit and withdraw funds to ACH transfers. You can deposit money in many online savings accounts via mobile check deposits, ACH transfers or wire transfers from other accounts. Read the fine print when evaluating an online savings account to ensure you know what your deposit and withdrawal options are.

In addition, savings accounts also limit certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle under Federal Reserve’s Regulation D (Reg D). You may be subject to a fee or having your savings account closed or converted into a checking account if you make excessive withdrawals.

Savings account advantages for your emergency fund

  • High APYs: High-yield online savings accounts offer competitive interest rates, which can boost your emergency fund. It’s not uncommon to earn at least 1.70% APY on your balance.
  • No fees: Don’t want monthly maintenance fees or excessive transaction fees to chip away at your fund? There are many high-yield online savings accounts that come with no fees.
  • Low to no minimum balance requirements: Many online savings accounts don’t require their customers to keep a minimum balance, which could be a benefit to people who are just getting their emergency fund started.

Keep your emergency fund in a money market account

A money market account could be a good option for your emergency fund, especially if you’ve already built a sizable balance. You can sometimes find higher APYs on money market accounts than other deposit accounts at conventional banks. However, you may need to maintain a substantial minimum balance to earn interest.

Money market accounts come with a debit card and checks more often than not. This extra degree of access makes it easier to withdraw money and cover emergency expenses on the fly.

Keep in mind that like savings accounts, money market accounts are also subject to Reg D, which limits certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. Factor in any potential monthly maintenance fees and excessive withdrawal fees as you evaluate whether a money market account is the best place for your emergency fund.

Money market account advantages for your emergency fund

  • Easy access to money: The checks and debit cards that come with most money market accounts provide convenient access to your emergency fund.
  • High APYs: Like high-yield online savings accounts, money market funds offer high interest rates.

Keep your emergency fund in a cash management account

Cash management accounts combine some of the best features of both checking and savings accounts, and could be a great choice for your emergency fund. Cash management accounts typically offer competitive interest rates and accessibility that rivals regular checking accounts.

Fintech firms like Wealthfront, SoFi and Betterment offer cash management accounts. Some combine the functionality of savings and checking accounts, while others offer separate savings- and checking-like accounts. Some function more like high-yield checking accounts, with fewer requirements than conventional deposit accounts.

If you’re thinking about keeping your emergency fund in a cash management account, you need to pay close attention to the available features, which can vary widely. Some cash management accounts don’t offer the ability for customers to spend their money with a check or debit card, which could make it tricky to access your emergency fund on a moment’s notice. You may need to transfer the money to a third-party account before you can use it.

Cash management account advantages for your emergency fund

  • Easy access: Many cash management accounts offer debit cards with few to no withdrawal limits. However, some do not — so you need to do your homework before choosing.
  • High interest rates: Many cash management accounts offer APYs that rival the rates of high-yield savings accounts and the best money market accounts.
  • No fees: Few cash management accounts charge monthly maintenance fees that would eat into your emergency fund.

Keep your emergency fund in a no-penalty CD

Certificates of deposit (CDs) pay competitive rates, but in exchange, you agree to leave your money untouched in an account for a set term, such as 12 months. If you withdraw the balance before the end of the term, you are charged an early withdrawal fee equal to some or all of your earned interest. This limitation prevents CDs from being the best place to keep your emergency fund.

Even if you use a CD ladder — a series of CDs that expire at predictable intervals, giving you great rates and slightly better liquidity than single CDs — you still might be facing early withdrawal fees when an emergency hits and you need access to your money.

There is a special kind of certificate of deposit, called a no-penalty CD, that is a potential option for an emergency fund. No-penalty CDs offer good interest rates and don’t charge the early withdrawal penalties that characterize standard CDs.

These accounts usually come with other rules, though. If you need to dip into the account, you may be required to withdraw the full amount — even if you only need a portion of the money. Some no-penalty CDs allow for a fixed number of partial withdrawals and may charge you a fee if you exceed the limit. You generally can’t touch the money at all until seven days after you fund the CD. Most (if not all) no-penalty CDs come with minimum balance requirements.

Advantages of no-penalty CDs for an emergency fund

  • Good, not great, APYs: Some no-penalty CDs offer competitive APYs, but the highest rates are typically reserved for accounts with longer terms and/or higher balances.
  • No early withdrawal fees: Unlike conventional CDs, no-penalty CDs don’t punish you with a fee if you need to take out the money before the term is up.
  • Wide availability: Whether you’re an online banking devotee or you prefer the in-person experience at a branch, you can find no-penalty CDs at financial institutions nationwide.

Keep your emergency fund in a Roth IRA

When thinking about where to store your emergency fund, a Roth IRA might not be the first thing that comes to mind. It’s a retirement investment account, after all. However, Roth IRAs come with some special advantages that make them a potential place you can pull money from in an emergency.

Roth IRAs are funded with after-tax dollars, and you can withdraw the contributions you’ve made at any time you want, without paying a penalty. The earnings, on the other hand, are subject to a 10% withdrawal penalty if you take them out before age 59 1/2 or before the account is five years old.

There are some exceptions to these rules, which can be helpful to know if you’re using a Roth IRA for your emergency fund. You can make early withdrawals without penalty if you lose your job, you need to cover health insurance or medical expenses, you become disabled or you’re buying your first home. You will need to pay tax on the earnings, though.

If you do need to use retirement funds to cover a major emergency, the money in your Roth IRA may come with fewer tax implications than the funds in other types of retirement accounts, like a traditional IRA.

Keep in mind that using retirement funds for something other than their intended purpose could set you back on your long-term savings goals. Try to have another dedicated emergency fund that you can access for unexpected expenses.

Advantages of a Roth IRA for your emergency fund

  • Potential for high returns: Contributions to a Roth IRA can be invested in a wide variety of different asset classes. Pick favorable investments, and your returns could be much greater than would be possible in any deposit account. Of course, poor investment decisions or market downturns could also lead to negative returns.
  • Penalty-free withdrawals: The money you contribute to a Roth IRA can be withdrawn without taxes or penalties under certain conditions.
  • Tax-free earnings: You can spend the earnings from your Roth IRA after age 59 1/2 without paying taxes, as long as the account is at least five years old.

Do not keep your emergency fund in stocks, ETFs or mutual funds

It might be tempting to try to grow your emergency fund by investing in the market via a brokerage account or a robo-advisor. But you might want to think twice about the downsides and potential risks involved in that strategy.

The biggest risk of investing your emergency fund is that its value could decline. Remember, your emergency fund is not an investment — it’s an insurance policy against rare but devastating emergencies. It’s a sum of money you need to be able to count on to provide peace of mind. After you’ve topped up an emergency fund, start investing other funds in a brokerage account.

You can’t predict when you’ll need the money saved in an emergency fund. In a true emergency, you would need to sell your stocks, ETFs or mutual funds — possibly at an unfavorable time, possibly for a loss. It all depends on how the market is performing.

Even if you do sell an investment for a favorable return, you will need to pay capital gains taxes on the earnings. While more favorable than typical income tax rates, the capital gains tax rate could still chip away at the overall amount you have at your disposal for an emergency. Worse yet, you may be subject to a higher tax rate if you don’t hang onto the assets for more than a year.

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.

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Banking

How Much Will My Stimulus Check Be? Calculate Your Payment

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

As the coronavirus (COVID-19) pandemic continues to batter the economy — prompting the stock market to plummet and unemployment claims to spike — the U.S. federal government is throwing taxpayers a life raft, in the form of stimulus checks.

Congress has passed a $2 trillion relief bill that aims to provide emergency assistance to individuals, families and businesses affected by the coronavirus pandemic, including one-time payments made to individuals. The amount of money you can expect to see from Uncle Sam, though, is based on a number of factors, ranging from how much money you make to how many children you have.

Who qualifies for a stimulus check?

Under the relief bill — dubbed the CARES Act — most adults who have a valid Social Security number will be able to qualify for a stimulus check, with the size of that check based on your 2019 or 2018 tax return.

You must file a simple tax return if you don’t usually file a return: You also qualify for a stimulus check if you receive Social Security benefits for disability, retirement or Supplemental Security Income, according to the AARP. If you typically do not file a tax return because you receive Social Security benefits or have a low income, however, you will need to file a simple tax return to receive your cash payment.

You must fall below income thresholds: The bulk of those who do not qualify for a stimulus check will likely be high-earners: Under the CARES Act, if you’re an individual with no children who earns over $99,000 or are a married couple that filed jointly and are making more than $198,000, you are not eligible to receive a stimulus check.

You cannot be claimed as a dependent of someone else: Additionally, in order to receive a stimulus check, you cannot be claimed as a dependent of someone else. That’s noteworthy, and may mean that millions of dependents who are not children under the age of 17 could end up missing out on relief checks. As the Center on Budget and Policy Priorities points out, filers only receive an additional $500 for each child under 17, which could be problematic for people who support dependents like the elderly, adults with disabilities and college students.

You must have a valid Social Security number: To receive a rebate check, each member of the household (including children) is also required to have a valid Social Security number. Per the Center on Budget Policy and Priorities, this may mean that households of certain immigrant families with children who are U.S. citizens could still be denied a stimulus check.

How much are the stimulus checks?

The amount of your stimulus check is based off of your adjusted gross income, as well as how many children under the age of 17 you have. Here’s how the one-time, non-taxable payments break down:

  • Up to $1,200 per adult
  • Up to $2,400 for couples filing joint returns
  • $500 per child under the age of 17

However, the checks start to decrease by $5 for every additional $100 of income beyond the following income thresholds:

  • $75,000 for individuals
  • $112,500 for head of households (typically single parents)
  • $150,000 for couples who filed a joint return

Certain individuals with higher adjustable gross incomes aren’t eligible to receive a stimulus check at all. The checks completely phase out at the following income thresholds:

  • $99,000 for individuals with no children
  • $198,000 for married couples with no children

How does the government determine how much I get?

The government will determine the size of your cash payment based on the adjusted gross income (or your total gross income minus certain deductions, such as 401(k) contributions) and information reported on your 2019 tax return. For those who have not filed a 2019 tax return, tax returns from 2018 may be used instead to determine your check amount.

If you don’t typically file taxes and have no income – and instead rely on Social Security benefits – you are still eligible to receive a stimulus check. However, in an update on March 30, the IRS stated that those who “typically do not file a tax return will need to file a simple tax return to receive an economic impact payment.” This includes low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return. They will not owe tax.

When will I get my stimulus check?

According to the CARES Act, the cash payments should be made as “rapidly as possible.” On March 30, the IRS announced that the distribution of the payments will begin within the next three weeks.

It’s also worth noting that if you have signed up for direct deposit with the IRS and have chosen to have your tax refunds deposited electronically — as opposed to receiving your tax refunds by mail as a paper check — you will likely receive your stimulus check faster, too.

Still, experts have been critical of that timeline, and have instead said the payment process could take months, not weeks. In 2009, for example, the Internal Revenue Service (IRS) took three months to send out checks to households as a cushion during the Great Recession.

How will I receive my stimulus check?

You can expect your stimulus check from the IRS to be either directly deposited into your bank account or mailed to you, based on the method in which you requested to receive your tax refund. However, the IRS also announced that in the coming weeks, the Treasury Department plans to open a web-based portal in which people can share their banking information with the IRS, enabling them to receive their payments via direct deposit as opposed to waiting for a check in the mail.

If you have filed your 2019 or 2018 taxes, there is no action needed from you, and the IRS will issue your payment automatically. In fact, the IRS is actually asking consumers not to contact them about the stimulus checks, stating it will make details available on its website.

Determine how much you will get from your stimulus check

To find out how much you can expect to receive from your stimulus check, reference the table below.

What you should do with your stimulus check

As many Americans face furlough or unemployment as a result of the coronavirus pandemic, a recent survey by MagnifyMoney found that most people intend to use their stimulus checks on necessities, like paying bills and buying groceries.

Many experts recommend keeping the money you receive from your rebate liquid, like in an emergency savings account, which should have enough funds to cover three to six months’ worth of living expenses.

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.

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Banking

ACH Transfers: Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

ACH transfers in action
iStock

You may have come across the term ACH when looking at different banking options or making certain banking transactions.

ACH stands for Automated Clearing House, which is a network and processing system that financial institutions use to transmit funds electronically between banks and credit unions. ACH transfers help to cut down on costs and processing times.

ACH transfers can include depositing funds directly to your account (transfers in, or credits to you), or transferring money out of your account to make payments (debits to you). For example, when your employer deposits your paycheck to your bank instead of handing you a paper check, that is an ACH transfer. Other direct deposits made by ACH transfer can include income tax refunds or other types of refunds. ACH direct payments (transfers out) often are used when you pay credit card or retailers’ bills (either one-off or recurring).

How long does it take for an ACH transfer to process?

ACH debit and credit transactions tend to process pretty fast. The National Automated Clearing House Association (NACHA) has operating rules that specifically require ACH credits — when you receive money — to settle within one-to-two business days. ACH debits — when you pay money — will settle the next business day. In most cases, all ACH transfers are settled within the same business day. But that doesn’t mean that money will land in your bank account that quickly. It could take as long as a few days, depending on your bank or credit union’s rules and regulations.

ACH money transfers — rules and fine print

Most financial institutions don’t charge a fee for incoming or outgoing ACH transfers. However, you are limited to six withdrawals per month for a savings account based on the Regulation D rule. So, if you go over that limit, your bank or credit union may charge you what’s known as an excess transaction fee.

Another fee you may encounter is a non-sufficient funds (NSF) fee — when you don’t have enough funds to cover the amount you’re transferring. Whether this fee is charged at all, and its amount, depends on the financial institution, so it’s best to check with yours.

Also depending on the financial institution, the limits on transfer amounts will differ. NACHA imposes a $25,000 daily limit on individual transactions. In other words, if you make multiple transactions, each one is limited to $25,000 in a single day. If you go over that amount, then your transfer will be processed the next day.

Wire transfers vs. ACH transfers

Both wire and an ACH transfers involve one financial institution sending funds to another one. Although both are electronic transfers, wire transfers use a different network, called Fedwire, and can involve transfers within the U.S. or internationally. Wire transfers are sent directly from one physical place to another, whereas ACH transfers are sent through a network.

In addition to making a wire transfer at a bank, you may make it at a nonbank provider — companies specifically designed to help you send money domestically or abroad. These companies may not require you to give your bank information. Instead you’ll need the receiver’s name, your personal details and the cash upfront that you intend to send. With an ACH transfer, on the other hand, don’t have this option.

Free and fast ways to transfer money

ACH transfers aren’t the only way to send or receive money. There are many other options that allow you to get almost instant access to funds with no fees involved. Two of these are cited below.

Zelle

Zelle is a peer-to-peer payment service where users can receive, send or request money to and from other bank accounts by using either an email address or phone number. This works even if the sender and receiver use different banks. Zelle claims that it can send money within minutes for no fee.

Many banks already offer Zelle via their existing online platform or mobile banking app. So, you may access it that way. However, if your bank does not have Zelle embedded in its system, then you may download Zelle’s own mobile app, create an account and use it to send and receive money.

Popmoney

Similar to Zelle, Popmoney is is a payment service that may be available at your bank (via their mobile or online banking services) for free. All you need is the recipient’s email address or phone number and you can send money. If you decide to use the service via PopMoney’s website, you’ll be charged $0.95 per transaction. There is also a monthly limit of $5,000 if transfering from a bank account and $1,000 if doing so with a debit card. If you’re using PopMoney via your financial institution, you’ll need to check with them to see what their limits are.

Tips for sending money safely

When sending money online, you want to be sure that you’re sending the money to the right person and that your own personal details are protected. Sounds obvious, but for example, double check your Wi-Fi connection to make sure that it’s secured. Of course you don’t want hackers to steal your sensitive information.

You’ll also want to ensure that you are sending money to a reputable place. NACHA created a booklet to help consumers spot scams and fraudulent behavior, such as merchant impersonations — that is, when someone pretends to be a company and states that you owe money on a purchase or a bill.

If you find fraudulent activity in your account, notify your bank as soon as possible. Sometimes you can reverse your ACH transfer if you accidentally sent the wrong amount or you suspect that there’s been an error.

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.