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Emergency Fund Savings: Money Market Or Savings Account?

by Craig Ford

If you have a personal finance book on your shelf at home, there is a good chance that the author recommends you put your emergency fund savings into a money market account.  Historically, that was good advice as money market accounts have offered higher interest rates than either savings accounts or checking accounts.

However, for at least the last couple of years, the opposite is true.

Should you keep your money in a money market or savings account?Right now, some of the money market funds that are typically the best performers are averaging a 7 day yield of between .15% – .05%.  On the other hand, bank savings accounts are paying as much as 1.45% (Nationwide Bank) followed closely with a 1.39% from Ally Bank (rates current at time of publication, please see respective banks for current rates).

Personally, I think this trend is going to continue for some time. (See comments below about changes to rules for money market funds.)

Let’s look at money market fund basics and savings account basics; then you should be able to determine which is best for your needs.

Money Market Fund Basics

Money in a money market is easy to access (liquid).  This is important for money you keep in an emergency fund.  Most money markets give you check writing privileges which makes it easier to access your money.  In addition, with a little shopping, you should be able to find a money market fund without fees.

It is important to note that a money market account is different than a mutual fund. This is a common misconception among new investors, so it is important that you understand that the two are different. A money market deposit account is FDIC insured up to $250,000 which guarantees your emergency fund against a bank failure.

New rules for money market accounts. In January, the U.S. Securities and Exchange Commission updated rules for money funds.  These changes make such investments more secure (theoretically), but also limit the potential yields of the money market funds.  Thus, it seems likely that yields will be reduced by these changes.

With a money market fund, the Interest is a variable rate.  This simply means it will change based on performance.  The money market managers do their best to keep the cost at $1 per share and share any of the additional income through interest payments.

Advantages of a money market account: Safety and ease of access (liquidity).

Savings Account Basics

Money in a savings account is very easy to access, (liquid) which is important for an emergency fund.  Depending on your bank, you can typically transfer those funds to a checking account or easily withdraw the money at the bank or using an ATM.

Interest rates at banks do change, but they are fixed in the sense that when they set a rate you know you will get that rate until the rate either increases or decreases. Many banks keep their interest rates for their savings accounts similar to competitors, which may give you more options for your emergency fund savings.

Money in a savings account is FDIC insured up to $250,000.

When it comes to shopping around for the best savings account, you can typically get the best interest rates from an online account. Here are some of the best savings interest rates.

Advantages of a savings account: Safe, easy to access (liquid), and competitive interest rates.

Current Money Market Owners Could Open A Savings Account, Too

If the hassle of changing banks and opening a savings account just to close it later if money market yields improve does not sound appealing, then you have options.  Call your current money market fund holder and ask about the minimum required balance (without fees).  Keep the minimum amount in your money market fund and then open a new savings account.  If, in the future, the money market interest rates exceed savings account interest rates, all you need to do is keep the savings account open with the minimum balance and transfer the money back into a money market account.

This way you are in a position to easily be able to take advantage of some of the highest interest rates.

Should You Open A New Savings Account For Your Emergency Fund?

In my experience, opening a new savings account online takes about 20 minutes.

Here’s what you need to figure out when comparing money market account sand savings accounts:

What is your current interest rate on your money market account?  How much more interest could you earn if you switched to a savings account?  Based on your account balance, how much more money would you have at the end of one year.  Take that number and ask if it is worth 20 minutes of your time.

In general, if you have an account balance of around $5,000 in a money market account, you will be better off making the switch to a savings account.  But, be sure to do your own math.

In my case, I have my emergency fund in an account with Capital One 360.  This account is linked to a checking account with Capital One 360 so I can instantly transfer money from my savings account into the checking account and then write a check.

Do you think a money market or a savings account is the best place for an emergency fund?


Published or updated April 12, 2013.
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{ 32 comments… read them below or add one }

1 basicmoneytips.com

In my opinion both of these types of accounts are liquid so I think it is fine to have either. The usual issue with a money market is the number of transactions you have per month or the balance you keep. If it is has a more attractive rate, put your money there. If something happens, close it and move your money to savings, like the article says, it takes about 20 minutes to open a new account (if you do not have one already)

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2 LeanLifeCoach

When you are just starting you E-fund or that’s all you have while you are paying off you debt the difference in these may not be worth worrying about. I would go with which provides the most convenience and easiest access. Once you are debt free and begin accumulating significant financial resources I’m thinking neither of these is right.

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3 fredct

One important distinction…you’ve seemed to mix the terminology between “Money Market Funds” (MMFs) vs “Money Market Accounts” (MMAs).

MMFs are a mutual fund, is *NOT* FDIC insured although usually backed by the financial institution and insured by another company as well. The money is invested in instruments that span companies and is only run by the fund company you invest with. These are the ones with the $1/share value and “breaking the buck” if it falls below that (very very rare).

Money Market *Accounts* on the other hand, are really no different than Savings account. They’re run directly by the bank and *are* FDIC insured. The only difference between MMAs and Savings Accounts is that typically MMAs offer checking writing (but not always), and typically Savings Accounts don’t (but not always).

http://www.bankrate.com/brm/news/drdon/20020206a.asp

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4 Ryan

Thanks for the correction, Fred.

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5 Craig Ford

Fred – You are correct that I should have been more clearn about the terminology. I did in fact write about Money Market Accounts (MMA), but unfortunately did use the words money market fund. I did this for a little gramatical variety, but in the process did not realize I might confuse the readers.
Thanks so much for making that clear for all the readers.

Is is really true that the only difference is ‘check writing’? I understand that MMA accounts hold other ‘safe’ securities with your funds. With a savings account those funds are used by the bank for lending.

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6 fredct

Hi Craig, thanks for the reason. I think you’re right, but I don’t know for sure – I’m not a banker or anything, so I can’t say it with any certainty.

That’s one reason I didn’t bring it up, and the other reason is that to the customer, I don’t think it matters. How exactly the money is used doesn’t impact their experience at all.

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7 vickie

Why would you want to keep your hard earned money in a bank? Legal loopholes permits banks to do whatever they want at their discretion. Do you have a credit card or other type of loan at the same bank you have a checking or any type of savings account? Read the fine print on your credit card and other statements and you will see in very small writing the words Off Set. Your savings of any type are safer in a federal credit union that is owned by the people. As long as we the people give our money to the banks for supposedly safe keeping they have the power. It has been proven many times over that alittle power just makes bank want more and they do not handle power well, can anyone say Government Bail Out?.

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8 Sandy L

I’ve had bad luck with both these approaches. The problem is that they are “too liquid” and I have drained and had to rebuild too many times.

I’ve been doing savings bonds instead and in 7 years I’ve never cashed a one…and in the first year you can’t anyway because they’re not vested. Once our savings bond balance was big enough, I got rid of most of my liquid cash buffer and used to pay down debt.

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9 Craig Ford

Sandy,
Thanks for your comment. The only problem with savings bonds for an emergency fund is that if you have an emergency you can’t get the money.
For other types of savings a bond might be a good option depending on your spending personality.

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10 craig

I didn’t realize there was much of a difference. It took me about 5 minutes to set up a new money market account online through Citibank and use it as a savings account. I think the interest is slightly higher, although it really is making such a minimal difference.

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11 vickie

Craig I’m gueessing from your statement you either are a citbank Online employee or your invested in Citibank in some form. Why hasn’t the word “Off Set” been mentioned while promoting banks, onlineor otherwise? Well that was a dumb question of mine wasn’t it? Federal Credit unions are the way to go for any type of account. Owned by the people for the people. Banks fall way short of the concept. They are owned by the investors for the investors oNLY..

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12 Investor Junkie

Actually neither at the moment. The interest rates are so low you run the risk of loosing money in terms of real dollars (because of inflation and expenses). What you think might are “risk free” investments are risky with inflation. This is the primary reason I created this post on my web site:

http://investorjunkie.com/the-4-percent-rule-to-investing

There are other investments, that have some return risk, will beat inflation. They are also just as liquid as MM accounts.

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13 fredct

I think the important thing there is “have some risk”. Risk is appropriate for some things and not for others.

This post began talking about emergency funds. When dealing with emergency funds, putting your principal at risk it plainly, flatly inappropriate. When you’re dealing with emergency funds, the most important thing is having the money there if you need it. Any return is simply a nice bonus.

Now, if you’re talking about longer term investments for which you can take some risk, then yes, being in a MMF, MMA, or savings account is probably not the way to go.

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14 Investor Junkie

Fredct,

It sounds like you took some “guru’s” advice without fully looking at it in depth.
I can understand if someone who has no savings, and has only $1500.00 to their name. Put it into a MMF, MMA or savings, as it needs to be closely held to your chest. It must be said, every investment has risk. EVERYTHING. Those MMF which were “safe” investments “broke the buck” which NEVER EVER happened. There is no such thing as a “risk free” investment. Loss of principle is just one risks. There is inflation, interest, and even government risk.

If you are talking about the traditional amount emergency savings (say $21000 for 6 months) you ARE losing money with the funds in terms of real dollars. Be it inflation risk, or principle risk what’s the difference??? If the annual inflation rate is 2.7% (which could easily be this year), and you have a MMA that only 1.3% annually, how is this safe? You lost 1.4% of your money in real terms. How is this different than losing 1.4% in principal? Answer: it’s not. Most people never factor inflation in any investing. How often do people need access to their emergency savings? Not as often as people believe and there have been some studies on this. So managing

There are plenty of liquid investments that are safe, that will generate more income than what is proposed in the blog and also beat inflation in the process. In fact, just posted about Ginnie Mae bond investing:

http://investorjunkie.com/ginnie-mae-investing

Which has returned 6.36% for the past 10 years, and has not had one negative year for the past 10 years.

If I had that 21k I would divide it up into different safe income producing assets.

I’m obviously not stating putting all your emergency savings into the stock market. It should also be noted, ones you have a certain amount of savings, emergency savings is pretty much useless. You best to have it in what I call your “security bucket” which is primary fixed income assets.

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15 fredct

Its unfortunate to see the fear mongers come out of the woodwork, although unsurprising that they would twist my words when they do.

Of course Junkie is right that nothing you do with your money has no risk. Of course there’s risk with everything… inflation risk, default risk, market risk, whatever.

However, he clearly ignores the fact that I already explicitly labeled ‘principal risk’ as the concern with emergency funds. For emergency funds, you need to minimize – to every possible degree – the chance of not having your principal available should you need it.

I further greatly disagree that only people with no assets should have emergency fund allocated. Its exactly those people will some money to their names that can afford the flexibility to allocate some amount of money to emergencies, while investing others with longer term horizons.

As for the suggestion of GNMA, its a lovely investment option for the right needs, and I love Vanguard as fund company. But the number used are misleading. For starters, the 6.36% listed may be true over the last 10 years, but its unfair to compare it to *current* MM/Savings account options. Those 10 years spanned much higher interest rate times. Currently the GNMA fund is yielding closer to 3%.

Its also not a coincidence that junkie picked a 10 year time frame. Between Sept 1998 and Jan 2000, that fund lost 6.5% in share value. Between June 1993 and Nov 1994, the share price declined 9.4%. Its no market crash, but if you lost a job in that time frame, you wouldn’t be happy to see your emergency fund having taken a nice haircut.

(here’s the chart – http://finance.yahoo.com/echarts?s=VFIIX#chart2:symbol=vfiix;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined )

16 Investor Junkie

@fredct:

“Its unfortunate to see the fear mongers come out of the woodwork”
Fear mongering would mean what I am stating is false. It is not. You have yet to disprove anything and as I show below your statements you counter are false.

“the chance of not having your principal available should you need it.”
Tell me what’s the difference then between this and inflation? Yes not losing your principal might make you feel warm and fuzzy. In terms of real dollars you are losing money with inflation so tell me again what’s the difference?

“Its also not a coincidence that junkie picked a 10 year time frame.”
Actually it was, but OK I’ll go along with your false statement and use the 1990′s.

“Between Sept 1998 and Jan 2000, that fund lost 6.5% in share value.”
Where did you get this number? In NAV price maybe, in total value with dividends included NO. Just because NAV price decreases does not mean you lost real dollars. Instead of your graph of the NAV, lets use Morningstar’s growth of 10k from 1/1/1990 – 12/31/1999

http://img684.imageshack.us/img684/9571/generatefundchartashx.png

“Between June 1993 and Nov 1994, the share price declined 9.4%.”
Share price maybe, total value including dividends no. Which do you care about? Total value, or NAV price?

Unfortunately Morningstar does not show yearly returns prior to 10 years ago. I do show in 1999 the investor return% (this after expenses and such) was -0.89% In 1994 it appears there was a slight (less than 0.5%) net loss.

You had two years out of 10 where the price, more or less, stayed about the same in value. Meaning a net of 0% for 1994 and 1999. There was no massive net loss you speak of. During the 1990′s of course the traditional accounts mentioned in this article were also generating much higher incomes. What is appropriate now may have not been 15-20 years ago. I also never stated during that period you should be placing money in GMNA and more than likely would quite the reverse. Currently what right is wrong, what is up is down. We are still not living in “normal” times. A good portion of the reason is the FED rate, but that’s a whole other discussion.

How often do you go into an emergency fund? Of course this depends upon the person’s specific situation. A great discuss to start at is this blog post:

http://www.obliviousinvestor.com/using-probability-to-set-the-size-of-an-emergency-fund/

“Its no market crash, but if you lost a job in that time frame, you wouldn’t be happy to see your emergency fund having taken a nice haircut.”
My point is you obviously do not put 100% into a GNMA funds. What you do is asset allocate into what are better performing assets during that time period. In today’s market a TIPs fund also makes sense to be into per my original reason of inflation.

“Currently the GNMA fund is yielding closer to 3%.”
And where do you get this stat? The yield is 3.59% currently and if the NAV value increases it is more than this. According to Yahoo as of Jan 31 the yield was 3.71% and the YTD return was 1.26% (for January)

17 Craig Ford

I agree. The emergency fund is about emotional peace. I’d rather get a smaller return, but know that money is always there (even if it is actually decreasing due to inflation).

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18 Ken

I’m in favor of savings accounts hands down. Correct me if I’m wrong, but don’t MMA’s have mimimum account balances?

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19 Craig Ford

Ken,
Most MMA do have minimum account balances. Yes, another advantage of a savings account.

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20 Single Guy Money

I like having a money market account because of the higher yields. It’s important to know what the minimum balance requirements and maximum number of withdrawals so you won’t be charged any fees. I keep the majority of my savings in my money market account but I also have several smaller savings accounts for a variety of purposes.

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21 Joseph | kickdebtoff

Good article craig,
We have our emmergency fund in savings account for now, and we are starting to explore other channels that may yield better rates.

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22 Kevin Khachatryan

I definitely agree that putting your money into savings is a better alternative than money market in this economy. Liquid money is hard to get and the FDIC insurance gives us less reason to worry.

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23 fredct

I’m not sure, who said that, Kevin.

Money Market *Accounts* are also FDIC insured.

Money Market *Funds* are not, although they are usually protected by multiple levels or coverage. I believe only 3 MMFs have every ‘broken the buck’ (i.e. not stayed at $1/share)… one in 94, one in 2004 or so, and one in 2008. This is out of the probably thousands of MMFs out there. So its not impossible, but its exceedingly rare.

Keep in mind that FDIC insurance covers you for $250K (through 2013, then scheduled to return to $100K).

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24 fredct

@ Investor Junkie:

I can’t reply in line any longer, so I’ll reply here.

> “Fear mongering would mean what I am stating is false. It is not. You have yet
> to disprove anything and as I show below your statements you counter are
> false.”

Not at all, the most effective fear mongering uses generally accurate statements and tries to add them up to something that far exceeds the sum of its parts. Or says things that are taken out of context as far as their likelihood or probability.

> > “the chance of not having your principal available should you need it.”
> “Tell me what’s the difference then between this and inflation? Yes not losing
> your principal might make you feel warm and fuzzy. In terms of real dollars
> you are losing money with inflation so tell me again what’s the difference?”

The difference is that you know exactly what you have in dollar amounts. When you’re saving for the long ( > around 10 years ) or even medium terms ( > a few years) losing out to inflation is a distinct problem, but that – to me any way – is missing the point of an emergency fund.

An emergency fund is there so that if you need the money tomorrow, you know exactly how much of it you have. If your car breaks down, or your house needs repairs, or you lose your job, you have a set amount of cash available to you. On a short-term basis like that – money needed in the next day, week, month, few months – inflation is not particularly relevant.

Is there a trade off for that? Absolutely. You make a lesser return. But the idea of an emergency fund is security, not maximizing your return. It should not be where the majority of your money is, but it is appropriate for a certain amount of it (a few thousand dollars – for something like 2 to 6 months of expenses).

> “Unfortunately Morningstar does not show yearly returns prior to 10 years
> ago. I do show in 1999 the investor return% (this after expenses and such) was
> -0.89% In 1994 it appears there was a slight (less than 0.5%) net loss.”

I agree, I had the same problem, I couldn’t find total returns going far enough back. The longest back I had was that graph I shared, but its certainly not ideal because it doesn’t show the total return, just the NAV.

> “My point is you obviously do not put 100% into a GNMA funds. What you do
> is asset allocate into what are better performing assets during that time period.
> In today’s market a TIPs fund also makes sense to be into per my original
> reason of inflation.”

That’s good, because I honestly felt it came across differently. I think it could’ve been read as “hey everyone, look at this new miracle investment I found! Extra gain with basically no risk!”

There’s a lot of bs like that in the financial world, so forgive me if my snake-oil-salesman alarm went off prematurely. I just want people to be aware that this investment is riskier (in an principal perspective) than your standard bank account, and then they can decide for themselves how they want to allocate their money.

> > “Currently the GNMA fund is yielding closer to 3%.”
> “And where do you get this stat? The yield is 3.59% currently and if the NAV
> value increases it is more than this.”

Right, that’s ‘closer to 3%’ than it is to the 6%+ you quoted. That’s all I meant.

Listen, we don’t disagree that much. The GNMA looks like a good, fair stable investment. It’d serve terrifically for many purposes. But even if it hasn’t yet, it does have the possibility of definite loses if the right financial storm hits. And that’s counter the point of an ‘emergency fund’ in my opinion.

An emergency fund is supposed to be your lifeboat in a storm, and putting it in an investment that can fluctuate – even modestly – is a bit like having a lifeboat with a few holes in it. It kind of defeats the purpose to me.

If someone wants to make that election, they can, but I want them to be aware of the pros and the cons and make the selection with open eyes.

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25 Investor Junkie

“The difference is that you know exactly what you have in dollar amounts. When you’re saving for the long ( > around 10 years ) or even medium terms ( > a few years) losing out to inflation is a distinct problem, but that – to me any way – is missing the point of an emergency fund.”

True as far as exact dollar amount. For me that doesn’t worry me as much as inflation.

At least from my experience it comes down to:
- how often do you need access to your emergency fund (much less than people think)
- If you have it allocated into different “secure” assets how long would it take to make them into liquid cash. CD laddering is one example.

My point is if you asset allocate your emergency savings you can ensure overall principle yet, and get a ROI.

“it should not be where the majority of your money is, but it is appropriate for a certain amount of it (a few thousand dollars – for something like 2 to 6 months of expenses).”

This is the beef I have. If it’s 6 months (say $21,000 in my example) that’s a big chunk of change to most people. In the current environment that’s earning almost nothing. You more than likely wouldn’t need all of it initially. So maybe from an asset allocation stand point, put say one month into a MM account, and the remaining 5 months into other “safe” assets (GNMAs could be part of it) that can be converted to cash quickly. You get the best of both worlds. You have quick cash, yet also have your money increasing in value over time, beating the more likely enemy of inflation.

“That’s good, because I honestly felt it came across differently.”

I have in my case my GMNA fund is 18% of my emergency fund and would not go over 20%. The rest, I have it it multiple CDs (a ladder from prior years, some I Bonds and 4% in Lending Club (yes LC)). In my case I have a year of expenses because I’m self employed, so I have somewhat increased requirements. My current blended rate is 5.18% The investments are safe, generating interest and have in quickly liquid form that I can take out 2 months without issue.

If I did what this post suggested I would be generating no interest on this real amount of savings.

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26 Investor Junkie

Let me also add:

“An emergency fund is there so that if you need the money tomorrow, you know exactly how much of it you have. If your car breaks down, or your house needs repairs, or you lose your job, you have a set amount of cash available to you.”

IMHO at least for me consider credit cards for that purpose. Use the credit card for the repair, then use your savings to pay the card off at the end of the month.

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27 Teresa

I was wondering if anyone might be able to provide any insight as to why an EFT from a Money Market Account (not MMF) would not be considered the same as and EFT from a regular checking account for the purposes of making a contribution to a Health Savings Account. The HSA trustee says that an EFT from a MMA doesn’t meet IRS requirements for contributions. IRS Publication 969 say, “Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.” I don’t understand why a contribution made via an EFT from a Money Market account would not be considered cash.

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28 fredct

Doesn’t make any sense to me. They’re likely wrong. Rather than banging your head against a brick wall, how about transferring your money to a checking account and sending it from there?

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29 Virginia

Have a money market account and the origininal document and deposit slip dated 1982. The bank can’t find any record of it being refunded or not. How do we proceed now? Researched the Comptroller for New York and can’t find anyting.

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30 Ryan

Virginia, you can check for lost money (see Find Missing Money – Unclaimed Paychecks and Other Property), but other than that, I’m not sure which courses of action are available. best of luck.

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31 vickie Mckasson

I’ve recently experienced just how insecure a money market savings account actually is. It is the actual bank or institute you should be in fear of taking your money if you also have a credit card through the same bank. My husband had a money market savings account and also our mortgage and a credit card. He recently passed away and the bank through a law called Off Setting took all but one dollar out of his money market savings account to pay on that credit card which by the way was not in default. They assured me it was legal and I assured them it was cruel and unethical. I was always under the impression a MMSA for your retirement was safe. My impression seems to be wrong. Any advice on this situation?

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32 Ryan

Vickie, I’m sorry for your loss. I would contact the bank general manager and ask them to replace the money in the account and set up a payment plan to cover the credit card debt. If they are not willing to do this then I would consult the services of a lawyer to intervene on your behalf.

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