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Strategies to Save

Why Do You Need an Emergency Fund?

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

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Building an emergency fund needs to be one of your core personal finance goals. Unemployment, serious medical problems, divorce and other unexpected life emergencies can all crop up at the worst possible times — and when they do, you’ll be ready for them if you have a well-stocked emergency fund. In this guide, we’ll explain how to build an emergency fund, how much you need in your fund, where to keep it, and when to use it.

What is an emergency fund?

An emergency fund is a sum of money that you set aside to pay for serious, unexpected financial emergencies. Your emergency fund helps you avoid relying on expensive forms of debt, like personal loans or credit cards. While you can’t always anticipate the unexpected, you can prepare by having an emergency fund ready to go.

An emergency fund should be reserved for major, unplanned situations that could disrupt your life. The costs incurred in these situations stem from serious, longer-term events. Some common scenarios could include:

  • Large, unexpected medical bills from chronic illness
  • Major car repairs or medical expenses after an accident
  • Paying for living expenses in the event of job loss or divorce
  • A major unplanned emergency home repair

Note that an emergency fund is different from a rainy day fund. A rainy day fund is meant to handle smaller one-off expenses that are somewhat predictable, such as routine home maintenance, broken appliances, last-minute travel expenses or the like. You would expect to be paying expenses out of a rainy-day fund with a certain regularity, several times a year.

Your emergency fund needs to be something you hope you never have to use. Think of an emergency fund as more of an insurance policy than a supplement to your regular budget.

How much should I save in my emergency fund?

Deciding how much you should save for an emergency fund isn’t a one-size-fits-all answer. A good rule of thumb, however, is to cover your financial needs for a set amount of time based on your income and living expenses. The amount that’s best for you will depend on your individual circumstances.

For example, a single-income family of four will likely have different financial needs than a dual-income family of two, as would a person with a full-time job and someone who’s self-employed. Consider these different months-of-income size funds.

3-month emergency fund

If you are single and have a steady job, saving three months worth of your income 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. This size fund can also work for a dual-income family that can rely on a single income in case one person suffers a job loss.

6-month emergency fund

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, especially if the household has a single earner. This size fund is also recommended if someone in the family has a chronic medical condition that can incur frequent visits to the doctor or hospital.

9-month emergency fund

Anyone who is self-employed or has infrequent income, such as a freelancer or commission-only salesperson, 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 as well as the loss of a client or project or a lull in income.

How to build an emergency fund

Whether your account should hold three months worth of expenses or more, saving money for an emergency fund can seem daunting, especially when you are first starting out. Just like any form of saving, though, you can use a few easy strategies to help build your momentum and your balance.

  1. Make your emergency fund a priority: Most people have more than one financial goal, but it’s important to treat building your emergency fund as your first priority. Start saving immediately, and set aside working toward your other financial goals until after you’ve reached your target emergency fund amount.
  2. Pay down debt: One exception to the rule above is if you have a high debt load — if so, make a goal of paying it off as fast as possible. It can be difficult to find extra money save when you have a sky-high credit card bill every month. Think of debt payments as a form of savings — you’re saving all of that interest by paying it off quickly.
  3. Review your budget: Get some traction on building your emergency fund by reviewing your budget and cutting discretionary expenses, such as dining out or buying new clothes. If you aren’t doing so already, consider using the 50/30/20 rule to grow your savings. Reserve 50% of your after-tax income for needs, 30% for wants and 20% for saving. Sticking to this formula can keep you on track to build your emergency fund rapidly.
  4. Find extra money: Expecting a bonus or a tax refund? Put it directly into your emergency fund instead of spending it elsewhere. Perhaps you’ve got items around the house that you no longer use and can sell? Having a lump sum can make a big impact on your balance, freeing up cash from your paycheck for other financial goals.
  5. Automate your savings: Set aside the same amount every month in your emergency fund. Make it easy by scheduling automatic transfers to savings from your paycheck. The online bank Chime offers a program that automatically transfers a percentage of each paycheck that you define into a seperate Chime savings account for you.

Where should I keep my emergency fund?

There are three key factors to keep in mind when choosing an account in which to keep your emergency fund: liquidity, yield and security. Liquidity means ease of access to your money: you should be able to get cash out of your emergency fund on very short notice. To maximize growth of the money you have saved, you’ll want a competitive interest rate on the account. And security means there’s little chance you’ll lose any money on your investment.

Taking liquidity and yield into account means that some accounts are better choices than others to hold your emergency fund. When it comes to security, it’s best to consider deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC) up to the legal limit. Let’s take a look at four deposit account options: cash management accounts, savings accounts, money market accounts and certificates of deposit (CDs).

Save your emergency fund in a cash management account

Cash management accounts typically combine the higher yielding interest rates of some savings accounts and CDs with the convenient liquidity of a checking account. This makes them an ideal account type for your emergency fund.

Keep your emergency fund in a savings or money market account

The best high-yield savings accounts pay a high rate of interest, making them a good place to keep an emergency fund. Money market accounts are a type of savings account that offers attractive interest rates, but typically require a relatively high minimum balance to earn interest. It’s not hard to find money market accounts and saving accounts that come with debit cards and even checks, providing better access to your emergency fund. One thing to be aware of: the Federal Reserve’s Regulation D limits “convenient” withdrawals — such ATM transactions — in savings and money market accounts to six a month.

Are certificates of deposit a good place for your emergency fund?

CDs are term deposit accounts where it’s possible to get an attractive rate of interest, in exchange for agreeing not to withdraw your money for a certain period of time. You may close a CD and get your money back at any point in its term if you need to, but you generally will give up some or all of your earned interest as a penalty.

This factor makes CDs a less attractive choice for your emergency fund. Possible ways to mitigate this include using no-penalty CDs or building a CD ladder. No-penalty CDs usually have lower interest rates than conventional CDs, but you may make either partial withdrawals or withdraw the entire amount at any time over the course of the CD’s term penalty free. With a CD ladder, opening CDs of different terms provides you with a predictably stream of maturing CD income, although this is still a lower level of liquidity than other deposit account types.

Is a savings account the best place for my emergency fund?

A savings account can be a good option for an emergency fund because there are many options that pay decent rates of interest, they’re relatively liquid accounts, and they carry FDIC insurance. Your best bet when looking for a savings account is to check out online banks. Find an account with an ATM card or check writing privileges.

Savings account pros

  • FDIC insured up to the legal limit
  • You can deposit as much as you want, without restrictions
  • You can make six “convenient” withdrawals from your account a month without penalty
  • Online savings accounts offer competitive rates
  • Many savings accounts come with a debit card and allow for check-writing abilities

Savings account cons

  • Interest can be lower than some other options, like CDs
  • Savings accounts at traditional banks offer rock-bottom interest rates
  • May get hit with excessive transaction fees if you make more than six withdrawals from the account a month

When should I use my emergency fund?

Here’s a good rule of thumb to decide if an expense is an emergency: Ask yourself whether it’s unplanned and uncontrollable. True emergencies that are both unplanned and uncontrollable are things that materially impact your health, wellbeing or ability to earn a living.

One-time expenses like a great deal on a vacation package, that big-ticket gift you’d love to get your spouse, or paying for sleepaway camp for your kids are all the opposite of emergencies. Deciding how to pay for things like this, no matter how expensive, is part of your regular budget planning process.

Regular expenses that are not surprises, such as paying your property taxes or insurance on your car or home, are not emergencies. These bills may be large, but at the end of the day they are predictable expenses that should be part of your regular budget planning process.

Losing your job to a layoff or coming down with a life-threatening disease are the very definition of emergencies. These are the reasons you have an emergency fund: Peace of mind for the worst that life can throw at you.

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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Strategies to Save

Understanding the Various Types of Deposit Accounts

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

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A deposit account is an account at a bank or credit union that allows you to safely and easily manage your money. Deposit accounts fall into two major categories: demand deposits and time deposits.

Demand deposit accounts, which include checking and savings accounts, may let you withdraw up to the full amount of your savings at any time without gaining permission from the bank or credit union. Time deposits, like CDs, restrict your access to funds for a set time period.

What are the types of deposit accounts?

The two key features of deposit accounts

All deposit accounts offer two primary features: security and interest.

Security

When deposited into an insured financial institution, your money is protected in the event of bank failure up to the legal amount per account by the Federal Deposit Insurance Corporation (FDIC), or up to the legal amount per credit union account by the National Credit Union Administration (NCUA). Joint accounts with two account owners get double the protection from the FDIC or NCUA. You can find out if the bank you’re considering is insured by the FDIC here.

Interest

You’re not just putting money into a deposit account to keep the funds safe — you also want to be rewarded for letting the bank hold your money. After all, banks and credit unions use funds held in deposit accounts to make loans to other customers, and earn profits. Interest payments is how banks and credit unions reward their deposit account customers, and incentivize them to keep funds in their accounts.

The longer you leave your money and earn interest in the bank, the greater the interest the account will earn. This is called “compound interest.” Depending on the bank and the account, interest may compound on a quarterly, monthly, weekly or daily basis. The more often interest compounds, the faster your balance grows.

When comparing prospective deposit accounts, you’ll want to review the annual percentage yields (APY). The APY advertised by your bank or credit union is the amount of interest you’ll earn in one year — the APY factors in the interest rate on the account as well as how often it compounds, so comparing APYs is the best way to compare the earning potential of different accounts.

Features of the main types of deposit accounts

These are the five main kinds of deposit accounts — let’s take a look at how they work and when you need them.

Checking accounts

Checking accounts are demand deposit accounts that let you deposit or withdraw money whenever you want. A checking account provides easy access to your money via paper check, ACH transfer, debit card, or cash withdrawal at a branch or ATM.

Some checking accounts pay interest, with our list of best accounts available paying upwards of 4.00% APY or more, as long as minimum balance requirements are maintained. But note that many checking accounts pay minimal or even zero interest, and regulations do not require institutions to offer interest payments on checking accounts.

Checking accounts may charge fees, including monthly maintenance charges; however, fees may be waived if you maintain a minimum balance or set up recurring direct deposits. You can be charged for money orders or cashier’s checks, and there may be limits on the amount you can withdraw in a given day or per ATM visit. Writing checks or swiping your debit card for amounts you don’t have can result in costly penalties like overdraft fees, insufficient-funds fees, or returned-check fees.

When to open a checking account

  • Checking accounts are one of your most important personal finance tools. This is where you manage the money you earn and spend on a day-to-day, week-to-week basis.
  • If you’re earning a low APY or earning no APY on your checking account, now might be the right time to examine your options. There are plenty of high-yield checking accounts available on the market today.
  • Look for checking account with zero fees. There are simply too many zero-fee options for you to be paying monthly account fees for your checking account.

Savings accounts

Savings accounts are demand deposit accounts that offer interest on your balance. Interest may be compounded daily, weekly, monthly, or annually. The benefits of savings accounts can vary widely based on requirements for a minimum opening deposit, monthly service fees, interest rates, and how the interest is calculated.

Savings accounts aren’t meant to offer the ease and frequency of access you get with checking accounts, but some do offer debit cards and even checkbooks. The Federal Reserve’s Regulation D mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. If you exceed your transaction limit, the bank may charge you a fee, close your account or convert it to a checking account, so check with your bank about requirements and penalties.

When to open a savings account

  • You may want to look into moving your savings into a high-yield savings account if you can get a better rate than what you’re earning with your current savings account.
  • When considering a new savings account, look for the highest possible APY you can find — most often, that means looking at our list of online savings accounts, which we have found consistently offer the best rates in the business.
  • Skip accounts with any monthly maintenance fees, as they eat into your returns. Also keep an eye on minimum balances to earn the highest possible APY.

Money market accounts

A money market account (MMA) is a high-yield deposit account that offers interest rates very similar to those offered by savings accounts. Money market accounts often provide access to your funds via debit cards or checks. However, like savings accounts, they too are subject to Regulation D which mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. You should check with your credit union or about any transaction limits and potential penalties. Minimum deposit requirements for MMAs are frequently higher than those for savings accounts.

When to open a money market account

  • Money market accounts have many of the same benefits and restrictions as savings accounts. MMAs generally require higher minimum deposits to open than savings accounts, and in exchange for that, you may be able to secure a higher APY. If you have a large sum you wish to keep as a liquid asset, a money market account may be your best option.
  • If you need easy access to your funds, a debit card or even a checkbook can be reasons to choose an MMA — although many savings accounts offer these conveniences as well.
  • Like with savings accounts, you need to understand the minimum balance required to earn the account’s highest advertised APY.

Certificates of deposit

Certificates of deposit (CDs) offer a way to earn higher rates of interest than those offered on savings accounts. CDs are time deposits, with common terms between one month and ten years. With a CD, you cannot withdraw money before the CD matures without incurring a penalty.

Penalty rates vary across the industry and by CD term length, but penalties generally amount to losing some or most of the interest you’ve earned on your investment at the time you withdraw. The interest rates are fixed over the term of the CD. The CD may automatically renew upon the maturity of the original deposit, so check with your bank or credit union for details.

CDs are insured by participating institutions up to the legal amount per account, per institution by the FDIC for banks and the NCUA for credit unions. Larger principal deposits and longer terms may fetch more competitive rates, although investors need to be sure they are comfortable losing access to their money for long durations.

You can stagger multiple CD maturity dates to create a CD ladder as a way of maintaining liquidity, capitalizing on increasing rates, and hedging against falling rates.

When to open a certificate of deposit

  • CDs are only a good option if you don’t need access to your money for whatever term you choose — either a short-term certificate with a term numbered in months, or a long-term CD lasting years.
  • Some CDs offer higher interest rates than savings accounts. Again, though, you must be prepared to leave your funds untouched for the term of the CD. Beware of high penalties for early withdrawals, before the end of the CD’s term.
  • Locking your money up in CDs could be a good strategy when market interest rates are falling: You can maintain a higher APY while other deposit accounts see declining rates. Conversely, they might not be the best choice when market rates are rising: By locking in a CD, you might miss out on higher APYs on other deposit accounts from higher rates.

Individual retirement account CDs

Individual retirement accounts (IRAs) are tax-advantaged vehicles designed to help people save for retirement. With an IRA CD, you may use funds saved in your IRA to invest in designated CD products. Credit unions, banks and brokerage firms offer IRA CDs, available as either traditional IRAs or Roth IRAs.

IRA CDs share most characteristics with regular CDs. IRA CDs may renew automatically like traditional CDs, so it’s important to keep track of your CD maturity dates so you can make educated investment decisions when the CD term ends. Keep in mind that deposits into an IRA account are subject to annual IRA contribution limits.

Like regular CDs, IRA CD investors need to beware of early-withdrawal penalties. Not only are there penalties for withdrawing from the CD before it matures, but if you remove the funds from your IRA, there is an IRS tax penalty of 10% on any distribution you take before you reach 59½ years of age. Still, the IRS may waive early distribution penalties for certain situations, such as a withdrawal of funds applied to a first-time home purchase.

When to open an IRA CD

  • IRA CDs are a great option for conservative retirement investors who want a decent rate of interest, without exposure to volatile stock or bond markets. 
  • Unlike stock and bond investments in IRAs, IRA CDs are insured by the FDIC and NCUA up to the legal amount per account, per institution.
  • Like standard CDs, IRA CDS prevent you from accessing principle for whatever term you choose.

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Strategies to Save

Fresh EBT App Review

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The government distributes Supplemental Nutrition Assistance Program (SNAP) benefits — also known as food stamps — via Electronic Balance Transfer (EBT) cards. The Fresh EBT app allows recipients of SNAP benefits to use a smartphone to check the balance on their EBT card. The Fresh EBT app has more than 2 million users and works with food stamp programs in every state.

What is the Fresh EBT app?

Until recently, people who receive SNAP benefits could only check their monthly benefit balance by calling a hotline — or keep a running tally of their grocery store receipts. More than 42 million people receive SNAP benefits, and 26% of low-income Americans rely on cell phones as their main internet connection.

In 2015, software startup Propel launched the Fresh EBT app, providing a quick and easy way for people who receive SNAP benefits to check their EBT balance. Users can also check their benefits from other federal programs, like Temporary Assistance for Needy Families. The free app is available for both iOS and Android and can be downloaded from the iTunes app store and the Google Play site.

Fresh EBT lets people keep up with the benefits available to them and also lets them see what they’ve purchased and where they bought it. The app also shows nearby stores and farmer’s markets that accept food stamps — although it doesn’t indicate which items are eligible to be purchased with funds from federal assistance programs.

How Fresh EBT works

The Fresh EBT app is linked to a user’s card via their state of residence’s EBT portal. Every time someone uses the card at a grocery store or farmer’s market, the total adjusts and users can check their remaining balance on the app.

When you log in, you’ll see a “recommended weekly budget” right underneath your EBT balance. This can help you plan your monthly EBT balance ahead of time, so that you don’t run out of money before the month is over. If you stick to this number each week, you’ll have enough EBT money to buy food for the whole month.

Other Fresh EBT features include free affordable and nutritious recipes and digital coupons you can use to make your EBT dollars stretch even further. Plus, as the average monthly SNAP benefit for one person is $134, Propel has partnerships with local and national nonprofits like Feeding America and Double Up Food Bucks to help people who find their SNAP benefits aren’t enough to get them through the month.

The app also shows the locations of nearby food pantries, offers coupons for participating retailers — users have accessed close to $15 million in savings so far — and provides access to healthy and inexpensive recipes.

The Fresh EBT app even touts that it offers job postings. You can see a list of jobs available in your area, along with a link that’ll take you to that job posting’s webpage. From there, you can get more information about the job and even apply directly for it.

How to sign up for Fresh EBT app

To use the Fresh EBT app, you must provide sensitive personal information like your Social Security number, although Propel reports that the information is encrypted. You also will need to have your EBT card number and PIN handy when you sign up. However, Propel notes that it does not store EBT card numbers or PINs on their servers, for extra security.

Although the Fresh EBT app is available to all U.S. states and territories, there have been problems in the past for some users who live in one of the 25 states where the food stamp program is managed by the government contractor Conduent.

Some users in these states reported that their balance data was unavailable for large stretches. And while Conduent does offer its own balance checking app, ConnectEBT, it’s only available in seven states on the Google Play store — Arkansas, Maryland, Maine, Oklahoma, South Carolina, Tennessee, and Utah. If you’re using an iPhone or iPad it’s even worse: the app is only available in three states: Oklahoma, South Carolina, and Utah. But while people can always check their balances through the hotline if they have any Fresh EBT app troubles, it’s also a good idea to hang on to grocery receipts as a backup.

Pros and cons of Fresh EBT

Among the common complaints about the Fresh EBT app are discussions about difficulties in connecting, or getting locked out of an account and having trouble signing back in. Positive reviews note the ease and speed of the app in comparison to calling the hotline to check a balance. Many users also like the coupons, the ability to see past purchases, and the recipes.

Pros of Fresh EBT

  • Provides a great way to check updated food stamp benefit balances: You can see your balance instantly, without having to call up the EBT hotline or finding your balance at the bottom of the receipt from your last food purchase.
  • Maps nearby food pantries and stores that accept food stamps: You can search on a map to see nearby stores and farmer’s markets where you can use your food stamp benefits. You can also find nearby food pantries, food stamp offices, and WIC clinics.
  • Offers digital coupons: You can download coupons for specific food items at specific stores right through the app. This can also help you make the most of your EBT benefits.
  • Special offers: In the “All Offers” section of the app, you can find other helpful money-saving resources for lower-income families. For example, you can get more information about discounted Amazon Prime membership, or access to lower-cost cell phone services.
  • Available in every state, with versions in English or Spanish: No matter which of these languages you speak — you can use Fresh EBT. And unlike some other EBT balance-checking apps, Fresh EBT is available no matter which state you live in.

Cons of Fresh EBT

  • Can have some bugs and loading issues: Since each state manages its own EBT program, there are a lot of different technologies that the Fresh EBT app has to navigate. Sometimes that can cause some difficulties with the app. For example, Conduent is a company that manages EBT benefit information in many states and it’s had some troubles in keeping up with Fresh EBT, causing some users to not see their current balance in the app for a period of time.
  • Does not provide a list of items that can be purchased with food stamps: The app can tell you which stores allow you to use your EBT benefits, but it isn’t able to tell you how much items cost there. Some stores can charge a higher price than others.

Who should use Fresh EBT?

Anyone who regularly uses SNAP food stamp benefits through an EBT card, owns a smartphone, and wants an easy way to keep track of their benefits will likely find the Fresh EBT app useful.

The app saves you money by offering coupons and directing users to stores offering specials. The app is also a one-stop shop for other information about early childhood education programs, local doctors, mental/health substance abuse programs, heating assistance and more.

All told, the Fresh EBT app is an efficient and data-driven way for people to get the most out of their SNAP benefits.

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.