Should Your Emergency Fund Go in an Investment Account?

Certificate of deposit (CD) accounts have become far more popular over the past couple years, and it’s easy to see why. As the Federal Reserve has hiked the benchmark federal funds rate in an effort to combat inflation, CD yields have risen sharply. It is now possible to get a 1-year or 2-year CD with a yield significantly greater than 5% — a solid return for a risk-free investment.However, with many people adding CDs to their saving and investing strategies for the first time, it’s important to know what it could mean for your tax bill.Is CD interest taxable?The short answer is yes. Interest you earn from a CD, is considered “interest income” in the eyes of the IRS, and is therefore subject to federal income tax.Not only that, but interest income is taxed as ordinary income. While capital gains and qualified dividend income is taxed at preferential rates in most cases, interest income is taxed according to your marginal tax rate.One important point is that CD interest is taxable in the year it was paid even if you leave it in the account. It doesn’t necessarily need to be paid directly to you, or even be available for withdrawal without penalty. In other words, if you have a 5-year CD, you’ll have to report the interest you earn every year.CD interest tax reporting requirementsTechnically, you are supposed to report every dollar of taxable income to the IRS. But for practical purposes, the IRS sets minimum thresholds of income that banks, employers, and other entities are required to report.In most cases, if you have earned more than $10 in interest during a single year, the bank or credit union that paid the interest is required to send you a tax document known as a 1099-INT statement. And all taxpayers should know is that if you receive a tax document, it’s a safe assumption that the IRS received a copy as well and knows about the income.Even if your bank doesn’t send you a 1099-INT, or you simply don’t receive one in the mail for one reason or another, you’re required to report interest income of $10 or more. This is a fairly low threshold, and it means that if you owned a CD with at least a few hundred dollars in it during 2023, there’s a strong probability you’ll have reportable interest income.Can you avoid paying tax on your CD interest?There are some situations where you might be able to reduce your tax bill, or even avoid taxes on your CD interest entirely. As one example, if you pay an early withdrawal penalty for taking money from a CD early, it can be deducted from your taxable income, even if it exceeds the interest income you earned.Another way to avoid taxes on CD interest is to use a tax-advantaged retirement account, such as a traditional or Roth IRA. Many banks allow customers to open an IRA, and many of the top online brokerages offer a selection of CDs issued by several different banks. For the 2023 tax year, you can contribute as much as $6,500 to IRAs, or $7,500 if you are 50 or older, and you might even be able to deduct the amount of money you put into the account and avoid taxes on interest income. Keep these tips in mind if you’re hoping to lower your tax bill for the CDs you own. 

By: Christy Bieber |
Updated
Sept. 5, 2023 – First published on Sept. 5, 2023

Incomes vary widely across the United States, with some people making many times the amount that others earn. If you’ve ever wondered how your personal finances stack up, and what “class” your income officially puts you in, here’s what you need to know.What income do you need to be upper, middle, or lower class?Based on 2021 data, here’s what you would need to earn in order to be in each class:Lower class: This is defined as the bottom 20% of earners. Those in the lower class have an income at or below $28,007.Lower middle class: This is defined as individuals in the 20th to 40th percentile of household income. Earnings among this group are between $28,008 and $55,000Middle class: The middle class is officially those whose earnings put them in the 40th to 60th percentile of household income. The income range is $55,001 to $89,744.Upper middle class: Anyone with earnings in the 60th to 80th percentile would be considered upper middle class. Those in the upper middle class have incomes between $89,745 and $149,131.Upper class: Finally, the upper class is the top 20% of earners and they have incomes of $149,132 or higher.Take a look at these numbers and see where you fall based on your own earnings. And remember, this is a snapshot in time — your earnings can change throughout your life, and so can your class designation.Will your success be determined by your income and class?It’s probably not a surprise that those in the upper classes or in the upper middle class do have a higher net worth than those in the lower class or the lower middle class. But the disparity is greater than you might think. While the median net worth of those with incomes of $149,132 or higher is $805,400, the median net worth of those in the lower class is just $12,000.Your income impacts how easy it is for you to build wealth. If you make more money, it is easier to save it and invest it in a brokerage account where it can work for you. If you make less money, then you may struggle even to cover the necessities out of your checking account, much less to buy valuable assets that help you grow richer over time.But that doesn’t mean people who don’t make a lot of money can’t be a financial success. A lot depends on what you do with the money you actually have, including how much you spend and how much you save.There are plenty of people who make over $100,000 a year who live paycheck to paycheck, and plenty of people with incomes that put them squarely in the lower or lower middle class who have diligently saved and grown quite wealthy over many years.Here’s how you can improve your standingDon’t be discouraged if you aren’t in the class you hope to be. For one thing, you have opportunities to increase your income by taking the following steps:Learning new job skills: You could obtain a certification, take part in a management training program at work, or take some classes to develop skills that may help you get promoted (such as computer training courses or public speaking classes), depending on your industry.Take on a side hustle: The average side hustle brings in $483 per month, which is a good amount of extra money that could make a meaningful difference in your income.Work some extra hours: If your company allows you to work overtime, take advantage of it, as many people are paid time and a half for overtime hours.Negotiate your salary: According to Pew Research, when workers negotiated for higher pay, 28% said they received the extra money they asked for and 38% indicated they were given more than originally offered but less than their ask. Whether you are getting a new job or staying at your current job but feel you’re underpaid, it doesn’t hurt to make a request for more money — especially if you can find salary data to back up the fact that others in your industry are paid more.And even if your earnings never put you in the top 20% of earners, you can still have a rich life and end up with the financial security you deserve — especially if you prioritize saving as much as you can for as long as you can.

By: Lyle Daly |
Updated
Nov. 5, 2023 – First published on Nov. 5, 2023

I flew business class for the first time a little over five years ago, on an eight-hour flight back to the United States. While I had flown first class on domestic flights before, this was a whole new level of travel for me. A seat that turned into a bed? I was hooked. My immediate reaction was “This is how I always want to fly.”And that’s what I’ve done. Travel is one of the things I don’t mind spending money on, so flying in business class is worth it to me. I’ve also used quite a few travel credit cards to cover the cost of some of that airfare in miles instead of cash.There’s a lot to like about flying business class. The seats are definitely much more comfortable, especially when they’re lie-flat seats. The meals can be pretty impressive, at least for something served on an airplane. Most people would probably assume there aren’t any real downsides, besides the higher cost.It’s mostly as good as advertised. But when you always fly business class, there is a potential downside that doesn’t get talked about much.Your travel standards go way, way upA single flight in business class might not change the way you look at travel. It’s nice, but you may consider it a one-time thing, or a way to treat yourself on special occasions.On the other hand, if you always fly in business class, then it’s almost certainly going to raise your travel standards. You get used to that level of service and luxury. Now, this isn’t necessarily a bad thing, but it does have consequences.For one, it becomes normal for you. It’s hard to go back to flying economy once you’ve gotten used to the perks of business class. And even business class loses some of its magic. Don’t get me wrong, I still love it. But it doesn’t wow me nearly as much as it did the first couple of times. At this point, I know the drill.It doesn’t just raise your standards for air travel, either. It will probably raise them across the board. When you always treat yourself to a nice flight, you may feel like you should do the same with your accommodations. No more hostels, questionable Airbnbs, or budget hotels. If you’re going to get to your destination in style, shouldn’t you stay in a nice hotel, too?There’s a good chance you’ll start expecting more from your travels. To get more, you usually need to pay more. Between airfare and hotels, you could end up spending much more than you used to.Embrace the change — or don’tTo reiterate, there’s nothing wrong with having high standards when you travel. Many people go from budget travel as young adults to more expensive trips as they get older. If you want to fly business class for every trip and stay in premium hotels, you shouldn’t feel bad about it. Everyone has their priorities with how they spend their money.You should, however, be ready for the costs involved. It’s not worth going into debt just so you can travel in luxury. Here are a few ways to finance those business-class flights, fancy hotel stays, and meals at Michelin star restaurants.Set up a travel fund and contribute to it every month. Open a high-yield savings account to serve as your travel fund. If you already have a savings account, you can also set up a sub-savings account specifically for travel. Then, decide how much you’ll transfer to it every month.Cut back on other expenses so you have more money to spend on travel. If travel is a priority for you, that may mean spending less on other, less important expenses. For example, I haven’t had a car for years because I can get around fine without one. Instead of an expensive car payment, I’d rather have more money I can spend on vacations. Part of improving your personal finances is deciding where you can spend and get the most out of your money.Get a travel credit card and use it to pay for all your purchases. Travel cards earn rewards that you can use to cover travel expenses. If you love to travel, it makes sense to have one of these credit cards. You can use it to pay for your regular expenses, and then use the rewards you earn to save on your travel costs.You may also discover that you’re fine with any type of trip. Some travelers don’t care about all the bells and whistles. There’s no right or wrong way to travel. Just know that if you start making higher-end travel a regular part of your life, it can be hard to go back.

If you want to do the math and calculate your savings potential, ask yourself how many of each category of beverage you’d likely order in the average day. Add up the prices and compare it with the per-day cost of the CHEERS! program for your cruise to see if the cost is justified.Of course, there are other benefits of the CHEERS! program to consider. For example, you can order a drink or specialty coffee you aren’t sure you’ll like — and if you don’t like it, simply order another one without wasting any money. And since bottled water is included, you can simply ask for one every time you order a drink and carry them with you throughout your trip.The bottom line is CHEERS! can certainly be worthwhile on your next Carnival cruise, even if you don’t plan to drink a lot of alcoholic beverages. But it depends on your preferences, budget, and how much you’ll utilize the various beverage options that come with it.

By: Chris Neiger |
Updated
Nov. 14, 2023 – First published on Nov. 14, 2023

The Supplemental Nutrition Assistance Program (SNAP) is a federal initiative to help families cover their monthly food costs. SNAP has some specific income and work eligibility requirements, but in general, the program can significantly help lower-income families who need extra help buying food.More than 22 million U.S. households — 12.5% of the population — receive SNAP benefits, according to Pew Research Center. The program is especially important right now as elevated inflation, rising interest rates, and the generally high cost of nearly everything have strained many Americans’ personal finances.Each year, the government decides how much SNAP benefits should increase for the next fiscal year, which begins on Oct. 1, and in 2024, the amount has gone up slightly, but not by much.SNAP benefits have increased for 2024The U.S. The Department of Agriculture (USDA) recently announced that it will increase the SNAP maximum benefits for a family of four in 2024 to $973. And while the increase is likely welcomed by those using the program, it’s also a relatively modest increase of 3.6% from the previous year’s maximum benefits of $939.The USDA makes an annual cost-of-living adjustment for SNAP benefits, but the problem with this year’s increase is that it’s not keeping up with the rapid rise in food prices. The USDA cites on its own website that food prices are up by 5.8% on average this year, above the historical average. For example, in 2020, food costs increased by about 3.4%.The USDA may have made the SNAP benefits adjustment based on food cost predictions for 2024 — which are estimated to rise by 2.1%, instead of looking back on food prices from the previous year. The agency says the average monthly cost for a family of four, using the USDA’s strictest food budget, is $974.Still, the increase to $973 per month may not go far enough to help some families, especially given the fact that inflation has soared over the past couple of years. If you want to sign up for SNAP benefits, you can do so through your state. You can find local SNAP offices, contact information, eligibility requirements, and online applications on the USDA website.Food is just one part of a monthly budgetWhile receiving any type of food assistance is likely welcomed by some families, there’s no getting around the fact that most Americans’ monthly budgets are strained right now. The latest Consumer Price Index figures show how much prices have risen in the following categories over the past year:Shelter costs are up 7%Gas prices are up 3%Electricity prices have risen 2.6%Transportation services are up 9.1%With all those expenses rising, it’s unsurprising that Americans aren’t feeling optimistic about their finances right now. Nearly 70% of Americans say the economy is getting worse and not better, according to a recent Suffolk University and USA Today poll. And 49% say rising food prices are one of their biggest concerns.Keeping track of a month’s worth of expenses is complicated enough on its own, and it’s even harder when prices rise. A budgeting app can be a helpful tool to track where your money is going and even to track how much your spending in specific categories has changed.There’s no telling what will happen with the economy in 2024. Right now, the job market remains strong, and thankfully, inflation is slowing. But many Americans’ budgets will likely remain strained as their savings rate has fallen and credit card debt has topped $1 trillion.That may keep demand for SNAP benefits elevated, and it remains to be seen whether the latest increase in benefits for 2024 will be enough.