Prepare for Financial Emergencies

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Prepare for Financial Emergencies
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View this presentation and other helpful material
at

• http//extension.ag.uidaho.edu/madison

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Steps to Financial Freedom
1. Manage Spending 2. Prevent Financial
Emergencies 3. Become Debt Free 4. Prepare
For Retirement 5. Teach Kids About Money 6.
Own a Home 7. Build a Legacy  
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Oh no! Now what?

• You made it. Youve tracked, budgeted, stepped
  down, separated needs and wants, sold stuff, took
  part time work and spend less than you make. But
  . . .
• Out of the blue you have a month with irregular
  expenses. Lets call this month December!
• Also this month, the car breaks down, and it
  needs repairs.
• Irregular and Emergency Expenses!
• What to do?

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Irregular Emergency Expenses

• Medical
• Dental
• Utilities
• Education
• Job Loss

• Vehicle Maintenance
• Accidents
• Gifts
• Kids (need I say more?)

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What about emergencies?

• Maintenance Repairs
• Medical expenses
• Accidents
• Job loss
• Etc.

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Everyone has a financial emergency plan

• Savings plan
• Credit/debt plan
• What plan are you in?

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What is emergency savings?

• 3 to 6 months worth of expenses
• High yield (APY)
• Accessible
• But not so accessible that you use it for
  non-emergencies

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• Try an out-of-town bank.
• Online bank.
• Dont carry cards to this account.

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Check out savings rates at

• www.savingsaccounts.com
• Checking accounts www.checkingfinder.com/

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FDIC Insured?

• 100,000 per financial institution.
• Valid only on basic savings vehicles.
• Not Valid for stocks, bonds, mutual funds, life
  insurance, annuities, etc.

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An emergency fund works for you

• Using an example of 30,000 annual income.
• 15,000 in an online savings account at 5 APY
• Yields 63 a month in interest.
• Or 750 a year!
• Online savings account, money market fund, cds?

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Debt, as an emergency plan works against you.

• If you lost your job, and it took you 3 months to
  find another one.
• 3 months of expenses (using our previous example
  of a 30,000 income) 7,500
• On a visa credit card at 20 making 150 monthly
  payments 16,200 total youll have to repay.
  This will take you 108 months and cost you 8,700
  in interest.

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With an emergency fund

• You would have borrowed that 7500 from
  yourself and paid it back to the emergency fund
  once you had a job again.
• At the same rate (150 a month) it would be paid
  back in 39 months
• No interest payments.
• Plus you were still earning interest off of the
  remaining 7500 in your account.
• You only had to pay back 5,909 of the 7,500 you
  borrowed from yourself

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Compound interest

• Those who understand compound interest earn it,
  those who dont, pay it.

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Difference

• With debt as your emergency plan, you will repay
  (paying interest)
• 16,200 over 9 years
• With savings as your emergency plan, you will
  repay (earning interest)
• 5,909 over 3 years and 3 months.
• Difference 10,291 and 5 years 9 months.

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Graph the Difference
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Why dont people do it?

• It takes planning and some self discipline . . .
  But not a lot!
• 1) Make it a priority
• 2) Make it automatic

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You may feel that you cant afford an emergency
fund.

• The truth You cant afford not to have one.
• The amounts are not so important as the direction
  youre headed!

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How to build an emergency fund.

• This is the 2nd step to financial freedom.
• That means it comes before steps 3-7!
• Until you have at the minimum of 3 months
  expenses saved
• Pay only minimum payments on your debts.
• Do not save for retirement.
• Exception 401(k) matched by employer
• Do not buy a home.

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• You must learn to walk before you can run!
• Youll be tempted many times to skip over this
  step. But in the end it will be a detriment to
  your financial future.

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How

• The 10 solution!
• 10 or more of your income until you have the 3
  month minimum.
• If you cant pay 10
• Pay 1 or 2 or 5 (whatever you can afford)
• Gradually increase to 10 over time
• Build the habit
• Treat it as a monthly bill

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How long will it take (saving 10 every month)?

• 2 years
• 3 months worth
• 5 account return
• 3-4 years
• 6 months worth
• 5 account return

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Should I dip into my 401(k) or IRA?

• 35 year old borrows 7,500 from 401(k)
• Pays it back at 7 interest over 5 years
• Total cost in lost earnings
• 44,211.13
• If loan is not repaid, you face additional taxes
  and a 10 percent penalty. Your loss rises to
  158,530.50
• NEVER, NEVER, NEVER DO THIS!!!

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It can help reduce costs in other areas of your
life.

• Raise insurance deductibles.
• Pay cash for big ticket items, used car,
  refrigerator, sofa, etc.
• Cash discount
• No financing
• This will save you money.
• But remember, you must have a plan to repay it.

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Paying it back!

• Your car engine throws a rod and is totaled.
  Insurance doesnt cover it. You need a car to
  get to work.
• Used car 7,000
• Financed for 5 years 8,317
• Emergency savings 5,337
• Difference almost 3,000!

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The system is the secret.

• How you use it is not as important as how you pay
  it back.
• 10 of your regular paychecks
• 0-3 months worth strictly for emergencies
• 3-6 months worth can be used for cash discounts
  
• Make it automatic/Treat it as a monthly Bill

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Personal Finance has two components

• The mathematical component.
• And the behavioral component.
• The math is the easy part. Weve done that here
  today. Now you just need to get your behavior to
  fall in line with what you know.

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View this presentation and other helpful material
at

• http//extension.ag.uidaho.edu/madison