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Strategies to Save

The Ultimate Guide to Handling Your Emergency Fund

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.

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Unexpected expenses have a way of popping up at the worst possible times. A good way to be prepared is having an emergency fund. An emergency fund is money put aside to use when something comes up and you need money right away.

One example of an unexpected financial emergency is a car repair – and they are not cheap. The average cost of car repairs after an accident can range anywhere from $50 to $1,500+.

The Federal Reserve recently reported that 4 out of 10 people in 2017 would have difficulty paying for a financial emergency of $400. Instead of having an emergency fund to rely on, these people may use credit cards to pay off the bill, only racking up more debt, or asking someone else to fund them the money.

Don’t let an unexpected expense put your finances in jeopardy. In this guide, we’ll explain how much to save in an emergency fund and where to keep yours stashed.

What is an emergency fund?

An emergency fund is money put aside specifically for an unexpected financial emergency. These funds are there to help you tackle an emergency so you don’t have to take on debt to cover expenses.

There are many reasons why you might need an emergency fund. Some of the most common scenarios include:

  • Handle an unexpected medical cost
  • Pay for car repairs after an accident
  • Provide liquid assets in the event of a job loss
  • Use toward an unexpected home repair

And once you use your emergency fund, it’s essential to start saving again right away. You don’t want to be unprepared for anything else that can come up.

Deciding how much to set aside for a rainy day is a question with multiple answers. In the next section, we’ll look at a few different rules of thumb for saving amounts.

How much money you should save

When you start saving money for your emergency fund, you should strive to cover your financial needs that are based on your individual income and living expenses. Single-income families may differ from dual-income families, and self-employed may differ than those who have full-time jobs.

Here are a few good rules of thumb when determining how much to save:

3 months: Best for singles

If you are single with a steady job, saving three months can work well. You only have yourself to worry about so it’s only your living expenses that will need to be covered, rather than those of a spouse or children.

6 months: Best for married couples with kids

Those who have a spouse and children will likely need to save more money than those who are independent. Six months should cover the costs for those who are married with a stable income and have young children living with them.

9+ months: Best for the self-employed

Anyone who is self-employed or with infrequent income, such as freelancers, can benefit by saving more than those who have a stable income. Nine months is a good go-to target. This way you’re able to pay for any unexpected emergency, such as car damage, or the loss of a client or project.

Where to keep your emergency fund

Now that you know why you should have an emergency fund, it’s time to decide which accounts are best to stow away your cash.

Two popular accounts for emergency funds are savings accounts and certificates of deposit (CDs). A savings account at a financial institution allows you to earn interest on your funds. Savings accounts can be ideal for emergency situations because it’s easy to write a check and access funds via wire transfer or an ATM.

CDs are deposit accounts which require you to keep your money stowed away for a particular time frame. In return for keeping your funds tied up longer, you can receive a higher rate of return than you typically would with a savings account

There are also CD ladders, which should not be confused with CDs. A CD ladder a strategy used to open multiple CDs with different terms. The idea is that you’ll have a new CD maturing every few months or so, giving you more flexibility in how often you can access the funds in those accounts.

With all the different accounts out there, it’s hard to know exactly why a savings account or a CD is the best option for emergency funds. But there are some distinctions to watch out for.

Unlike stocks and mutual funds, which have principal risk so you can lose money, savings accounts and CDs do not. This is incredibly important for an emergency fund. You don’t want your emergency fund to go down when the market does and therefore, not be able to withdraw the exact amount you need.

Why checking accounts aren’t the best options for savings

A checking account is similar to savings and CDs because it doesn’t have principal risk. You can access your money freely without any limitations, which can also be a negative. If you can access your funds at any time, you may find yourself withdrawing from your checking when it’s not necessarily an emergency. Plus, the rates for a checking account are usually much lower than those with a savings account or CD.

You want to be able to access your money when needed, but you also want to be able to save it so it’s there should an emergency pop up. A savings account allows you to get your money fast while CDs can take a few days and with a penalty. As for CD ladders, the full balance is not usually available, only a portion of what’s in your accounts.

Savings accounts vs. CDs for your emergency fund

When deciding on savings accounts or CDs for your emergency fund, there are several factors to take into consideration. Let’s take a look at the pros and cons for these two accounts to gain a better perspective on which might work best for you.

When savings accounts make sense

A savings account is a viable option for an emergency fund because you are able to place your money in a safe place and have access to it when you need it. As long as you follow the transaction guideline limits, you will not have to pay a fee, and you still earn interest on your money as long as it’s in the account.
Pros

  • FDIC insured up to $250,000 per account
  • Deposit as much as you want without restrictions
  • You can withdraw from your account six times per month without any penalties
  • Online banks offer very competitive rates on savings accounts, many times more than traditional banks
  • As rates rise, online banks tend to offer higher rates on deposit accounts as well
  • Some savings accounts allow for check-writing abilities

Cons

  • Interest can be lower than some CDs
  • Traditional banks offer rock bottom interest rates
  • May get hit with excessive transaction fee if you make a withdrawal/transfer from the account more than six times per month

When CDs make sense

While a savings account may have an advantage over CDs when saving money in an emergency fund, there are times when CDs may work better, such as for overflow savings. Once you have met your goal with your savings, you may want to invest the rest of your money (or a portion of it) into a CD or a CD ladder strategy to earn interest.

A CD or CD ladder strategy makes the most sense for those who don’t need the money right away or want ongoing access to it. If you take the money out before the CD term is up, you are at risk of paying a penalty fee. And remember, if you leave your money in there, you can get a higher rate of return.
Pros

  • FDIC insured up to $250,000 per account
  • Interest rates are usually higher than regular savings accounts
  • Rates are locked until maturity so they won’t fall

Cons

  • Rates are locked, which means they can’t rise
  • Possible penalties for early withdrawals
  • Restrictions on deposits

Best savings accounts for emergency funds

A savings account can be a good option for an emergency fund. MagnifyMoney has its own savings account marketplace to help compare and find the right account for you. Simply add your zip code and account balance to review your results instantly. To help get you started in your search, here are some of the best online savings accounts that may help you stow away cash for an emergency.

 

Marcus by Goldman Sachs Bank USA

Ally Bank

Synchrony

MySavings Account from MySavingsDirect

APY

2.25%

2.20%

2.25%

2.40%

Linked debit card?

No

No

Yes

No

Ways to access your funds

- Funds transfer with linked account
- Wire transfer

- Funds transfer
- Wire transfer Phone transfer -Check request

- Online transfer
- Phone request
- ATM withdrawals

-Transfer funds electronically

Time to transfer funds

Next business day

3 days; can also be expedited for 1-day transfer

Immediately for outgoing transfers

2-4 days

What to look for when vetting emergency savings accounts

When searching for a savings account, it’s smart to check out online banks. Many times you can find higher yields without monthly maintenance fees tacked on.

Keep an eye on savings accounts that can offer limited check-writing abilities for easy access to your money. Also, look into the bank’s transfer requirements and restrictions.

“If you need to move money from the savings account to your checking account to cover an emergency bill, you’ll want the transfer to be fast without small-dollar limits on the transfer,” said Ken Tumin, editor of DepositAccounts.com (also owned by LendingTree).

Best CDs for emergency savings

If you’re looking for CDs to help keep your emergency fund on hand, there are also many to choose from. Find some of the best CD rates directly on MagnifyMoney’s CDs marketplace by putting in your zip code and the amount you’d like to deposit.

Here are a few CDs you may want to keep an eye on as you begin your search.

 

Goldman Sachs Bank USA

Synchrony

Barclays Bank

Ally Bank

Terms available

6 months — 6 years

3 months — 5 years

1 year — 5 years

3 months — 5 years

Deposit required to earn starting APY

$500

$2,000

No minimum deposit

No minimum deposit

APY range

0.60% APY — 2.95%APY

0.75% APY — 3.00%APY

0.35% — 3.00% APY

0.75% APY — 2.85% APY

Early withdrawal penalty

For a CD term of less than 12 months, there is
“90 days simple interest on the principal at the rate in effect for the CD”

Starting with: 12 months or less terms are charged 90 days interest at “current rate”

Less than 24 months, there is a penalty equivalent to 90 days interest

There is an early withdrawal penalty for both high-yield CDS and raise your rate CDs; penalties vary and are determined on your CD term

What to look for when vetting emergency CD accounts

As with savings accounts, there are many options when shopping for CDs. Be sure to seek out banks that offer competitive rates, low early withdrawal penalties, interest withdrawal without penalty and bank-to-bank transfers that are done electronically so you can get your money the fastest.

6 tips for saving money for an emergency

Saving money for an emergency fund can seem daunting, especially when you are first starting to save. However, there are a few easy tips to help pave the path for a solid fund.

1. Make your emergency fund a priority

Start saving for an emergency immediately. Once you have reached your emergency fund goal, work on other financial plans and investments.

2. Adjust your budget

Cut down your spending habits and try your best to stick to a budget. Be truthful about your financial situation and don’t spend money you don’t have.

3. Use other cash sources

Try to put away cash received from other resources before you even miss it, such as work bonus, a raise or additional income from another resource. This way you won’t be worrying about trying to nickel-and-dime your paycheck to add money to your fund.

4. Don’t use your emergency fund for just anything

As your emergency fund grows, be sure to keep it there. You don’t want to use it on something else, such as a big, lavish purchase and then need it for a future emergency only to find it’s no longer there.

5. Be diligent about saving

Try to stick to your savings goal. Put away the same amount every month no matter what else may come up.

6. Pay down your debt

If you have a lot of debt, you’ll want to get that paid off as fast as possible. It’s hard to save when you have high bills (with high-interest rates) to pay off every month. Treat debt payments as a form of savings — just think about all the interest charges you’ll avoid by paying it off quickly.

You never know when a financial emergency might come up. Try your best to be well-prepared with an emergency fund. This fund will keep your money in a safe place so you can access it if an emergency should happen.

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.

Carissa Chesanek
Carissa Chesanek |

Carissa Chesanek is a writer at MagnifyMoney. You can email Carissa here

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Strategies to Save

How to Save Money Using the 20% Savings Rule

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.

You can find a lot of conflicting financial advice out there, but one recommendation that is rarely disputed is that you need to save money for the future. A strong savings game – including a savings account, an emergency fund and a retirement account – is a basic requirement for good personal financial health.

Understanding that you should build your savings is step one. Step two is knowing how much to save. That’s where the 20% savings rule comes in. This rule is part of the 50/30/20 budgeting method, popularized in a 2006 book by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, titled “All Your Worth: The Ultimate Lifetime Money Plan”.

Read on to learn more about the 20% savings rule and how it can help you save more.

What is the 20% savings rule?

The 50/30/20 budget recommends you divide your after-tax income in three broad categories:

  • 20% for savings: This includes savings for both near-term goals and your long-term financial security. Money in this category should be saved in an emergency fund, a high-yield savings account, and retirement accounts.
  • 30% for wants: Spending for things that are nice to have, but not strictly necessary. Money in this category is for entertainment, dining out, vacations, or a gym membership.
  • 50% for needs: Money in this category is for required monthly expenses like rent or mortgage payments, utilities, insurance, groceries and transportation.

Stephen Caplan, a financial advisor with Neponset Valley Financial Partners, a wealth management firm in the Boston area, said the 20% savings rule makes a lot of sense, especially for young people, because it helps safeguard against lifestyle inflation.

“The beauty of maintaining a 20% savings rate is that as you progress in your career and increase your earnings, you are able to live a nicer lifestyle and direct more money toward your future financial goals,” Caplan said. “If you focus on saving a specific dollar amount, rather than a percentage of your income, it’s easy to frivolously spend additional income.”

How to maximize the 20% savings rule

What makes the 20% savings rule work? It’s simple, flexible, and it can help you save more in the long run. Here’s how to make it work for you.

Set a budget

While other budgeting methods rely on detailed categories and strict dollar amounts, the 20% savings rule lets you allocate a percentage of your income to a variety of savings methods and accounts. This can be especially helpful if your income fluctuates from month to month. In months when you earn more, you can save more. If you earn less, you save less.

Start by calculating your after-tax income. This is the amount you have available to spend each month after taxes have been withheld from your paycheck or set aside for quarterly estimated payments if you are self-employed. If your employer withholds retirement contributions or insurance premiums, add them back in to reach your after-tax income. Now, multiply that number by 20%. Ideally, that’s how much you’ll put aside to savings each month.

Establish an emergency fund

Having an emergency fund is an essential component of long-term financial success as it prevents life’s curveballs, such as job loss, medical bills or unexpected home repairs, from sending you into debt.

Most financial experts recommend building an emergency fund equal to three-to-six months of expenses. If you don’t have this much saved yet, allocate a chunk of your 20% savings to establishing an emergency fund.

Focus on fixed costs

If you have trouble allocating 20% of your income to savings, Caplan recommends taking a hard look at the needs category before cutting wants.

“Too many people focus on trying to cut back the 30% discretionary spending category and ignore the big purchases in the 50% category,” Caplan said. “These expenses are usually fixed costs, such as mortgage, rent, and car payments, so getting them right from the start can have a significant impact on your financial well-being.”

Maybe you are spending more than you can afford on housing. It’s not simple to find a new apartment or sell a home, but over the long term paying less in rent or downsizing your mortgage could yield major savings. That new SUV may have felt great during the test drive, however it may be possible to reduce your monthly car payments by finding a more modest sedan. Again, downsizing could help rightsize your budget.

Get out of debt

Another unique aspect of the 50/30/20 rule is how it treats debt payments. Mortgage payments and minimum payments towards other debts, such as student loans and credit cards, are categorized as needs. After all, you need to pay at least this much every month to keep your home, avoid defaulting and preserve your credit score.

However, any additional payments made to reduce the principal balance of your debts are considered savings because once you’re out of debt, you can redirect those payments to savings.

If you have non-mortgage debt, after establishing an emergency fund, allocate a portion of your 20% savings to getting out of debt. The sooner you pay it off, the more you’ll have for long-term saving and investing.

Save for retirement

If you have access to a retirement plan through work and your employer offers matching contributions, you can boost your retirement savings without allocating more than 20% of your income to savings.

Contribute at least up to the percentage your employer matches. When your employer matches your contribution, it’s free money for you.

Create an automated savings plan

Too often, people make the mistake of saving only what is left over after covering their needs and wants. You can avoid this by automating your savings. Most banks will allow you to set up an automatic draft from your checking account into savings, or your employer may be able to have a portion of your paycheck direct deposited into savings.

When you automate your savings, you’ll save time, make it easier to commit to paying yourself first and reduce the temptation to spend what you should be saving.

Is 20% the right amount for you?

The 20% savings rule is simple and flexible, but it’s not for everyone. If you’re living paycheck-to-paycheck, just covering the necessities or facing other financial difficulties such as job loss or debt, you might need to work on increasing your income before you prioritize saving.

Caplan also noted the 50/30/20 rule might be a challenge for people residing in cities with high cost of living like San Francisco, New York, Los Angeles, and even Boston. “You’ll earn more in these cities,” Caplan said, “but housing costs a disproportionate amount of your income. This makes it challenging to keep your fixed costs under 50% of your income.”

If allocating 20% of your income to savings just isn’t feasible, start with a lesser amount, such as 15% or even 5%. The most important thing is to start saving. Eventually, as your circumstances change and you pay off debt, you can get closer to the 20% rule of thumb.

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.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Strategies to Save

Understanding the 50/30/20 Rule to Help You Save More

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.

Budgeting is tough. Not having enough money to cover your monthly expenses can leave you scrambling to dip into your emergency fund or relying on a credit card.

If you are looking for another way to manage your finances, you could consider percentage-based budgeting, which relies on a percentage of your income to determine your spending limitations. In a month where you earn more, you’ll have more to spend across your categories.

One approach is the 50/30/20 rule. This budgeting method was popularized in “All Your Worth: The Ultimate Lifetime Money Plan,” the 2006 book by U.S. Sen. (and current presidential candidate) Elizabeth Warren and her daughter Amelia Warren Tyagi.

Read on to learn more about the 50/30/20 rule, how to use it and why it might be the key to helping you save more.

What is the 50/30/20 rule?

The 50/30/20 rule states that you should budget your income in three categories: needs, wants and savings. It starts with your after-tax income. This is the amount you have available to spend each month after taxes have been withheld by your employer or set aside for quarterly estimated payments if you are self-employed.

If you receive a paycheck and your employer withholds retirement contributions or insurance premiums, add them back in to get to your after-tax income. Once you’ve determined your monthly income, you’ll budget it as follows:

  • Budget 50% toward your needs: These are required monthly expenses, such as your rent or mortgage payment, utilities, insurance, groceries and transportation.
  • Budget 30% toward your wants: This is the fun stuff, such as dining out, entertainment and the barre class you take on Saturday mornings.
  • Budget 20% toward your savings: This is for your financial security and long-term goals, such as creating an emergency fund or saving for retirement. This also includes vacations or home improvements.

Todd Murphy, a financial advisor with Prime Financial Services in Wilton, Conn., recommended direct depositing your paychecks into multiple bank accounts: 50% to checking for needs, 30% to a different account for wants and the remaining 20% to retirement and savings accounts.

“The most successful clients have separate banks for these accounts to limit the tendency to talk themselves into making ‘exceptions’ on their spending,” Murphy said.

An important note: If you’re working to pay off non-mortgage debts, such as student loans and credit card payments, you might wonder where those fit. Payments towards these debts fall into two categories:

  • The minimum payments required by your student loan or credit card company are needs. You need to pay at least this much every month to avoid default and harm to your credit score.
  • Any additional payments made to pay off the balance faster and get out of debt are savings. Why? Because once you’re out of debt, you can redirect those payments to saving and investing.

How to use the 50/30/20 rule

To show you how the 50/30/20 rule works in the real world, let’s consider a hypothetical example. Miguel’s take-home pay from his full-time job after taxes is $3,900 a month, and his employer withholds $200 a month for health insurance. Here is how Miguel might budget using the 50/30/20 rule.

Step 1: Calculate after-tax income

Since Miguel’s employer withholds $200 a month for health insurance, Miguel adds that amount back to his take-home pay to determine his income of $4,100.

Step 2: Cap needs at 50%

Now that Miguel knows his monthly after-tax income, he needs to think about his needs — what he spends each month on housing, utilities, insurance, groceries and the car that gets him to and from work.

According to the 50/30/20 rule, these costs should take up no more than 50% of his $4,100 income, or $2,050.

Miguel’s costs in this category are as follows:

Step 3: Limit wants to 30%

According to the 50/30/20 rule, Miguel has $1,230 to put toward his wants. That number may seem like a lot to some people, but limiting wants to 30% of income can be difficult.

Miguel has a Netflix subscription, stops for coffee every morning and likes to meet up with friends once a week for drinks. He also likes to take his girlfriend out to nice dinners a couple of times a week and tinker on his vintage motorcycle. Spending on all of those interests adds up.

Step 4: Restrict savings to 20%

The rest of your income should be set aside for emergency savings, putting money toward retirement, saving for future goals and getting out of debt.

According to the 50/30/20 rule, Miguel has $820 for the saving category. Let’s assume that Miguel already has an emergency fund, so he wants to prioritize retirement, paying off debt and saving for an engagement ring. His spending in this category might look like this:

How the 50/30/20 rule can save you more

The great thing about the 50/30/20 rule is it gives you a guideline for living within your means so you can save more.

Make adjustments

The 50/30/20 rule could open your eyes to changes you need to make. For example, if you run the numbers and realize housing takes up nearly 50% of your income, leaving little room for other necessities, you might decide to relocate to a less expensive neighborhood. Or you could look for other ways to reduce spending in the needs categories by shopping for new insurance or clipping coupons when you go grocery shopping.

Reduce your wants

If you’re overspending in the wants category, you may need to change up your daily habits: make coffee at home instead of buying it, cook at home more often or reconsider expensive hobbies. Small changes can add up to big savings over time.

Get a retirement bonus

If you have access to an employer-sponsored retirement plan, you may be able to get a boost to your savings without touching the other categories.

“Contribute up to the percentage your employer matches into your 401(k) or 403(b),” Murphy said. You’ll receive an automatic bonus when your employer matches your contribution.

Put more money into savings

Savings is an essential part of any budget because, without it, unforeseen expenses can leave you struggling to pay necessary costs of living or get you into debt. If you run the numbers and realize you’re not saving enough, look for ways to trim expenses in the needs and wants categories.

Pay off debt faster

Knowing you have 20% of your income to dedicate toward savings and paying off debt can motivate you to pay more than the monthly minimum and make a bigger dent in your balance.

After setting up your emergency fund, prioritize paying off debts. The sooner you pay off any credit cards, student loans and car loans, the more you’ll have to invest and save for retirement.

Is the 50/30/20 rule right for you?

As long as you have income left over after covering your needs, the 50/30/20 rule can work for you. However, if you run the numbers and realize a 50/30/20 split just isn’t feasible right now, don’t give up. Maybe your categories look more like 60/30/10 right now. That’s OK. Start where you are and look for changes you can make to reduce your cost of living, change your spending habits and get closer to a balanced budget.

Bottom line

The 50/30/20 rule is far from the only way to budget, but it’s a simple formula that allows you to meet your wants and needs and save money without strict dollar amounts and inflexible budget categories.

Murphy acknowledged this method might not work if you are experiencing financial difficulties, such as being laid off from your job. In that case, you may need to work on increasing your monthly income to cover your needs before allocating money to wants.

“Greater savings allows for more flexibility,” Murphy said. “If you live on less than half of your income, you are likely to never have a personal recession, regardless of the economy.”

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.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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