Prepare for Financial Emergencies

1. Prepare for Financial Emergencies

3. View this presentation and other helpful material at: http://extension.ag.uidaho.edu/madison

4. 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

5. Oh no! Now what? • You made it. You’ve 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. Let’s call this month December! • Also this month, the car breaks down, and it needs repairs. Irregular and Emergency Expenses! What to do?

6. Medical Dental Utilities Education Job Loss Vehicle Maintenance Accidents Gifts Kids (need I say more?) Irregular & Emergency Expenses

7. Everyone has a financial emergency plan • Savings plan • Credit/debt plan • What plan are you in?

8. 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

9. Try an out-of-town bank. • Online bank. • Don’t carry cards to this account.

10. Check out savings rates at • www.savingsaccounts.com • Checking accounts www.checkingfinder.com/

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

12. 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, cd’s?

13. 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 you’ll have to repay. This will take you 108 months and cost you $8,700 in interest.

14. 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

15. Compound interest “Those who understand compound interest earn it, those who don’t, pay it.”

16. 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.

17. Why don’t people do it? • It takes planning and some self discipline . . . But not a lot! • 1) Make it a priority • 2) Make it automatic

18. You may feel that you can’t afford an emergency fund. • The truth: You can’t afford not to have one. • The amounts are not so important as the direction you’re headed!

19. 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.

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

21. How • The 10% solution! • 10% or more of your income until you have the 3 month minimum. • If you can’t 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

22. 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

23. 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!!!

24. 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.

25. Paying it back! • Your car engine throws a rod and is totaled. Insurance doesn’t 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!

26. 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

27. Personal Finance has two components: • The mathematical component. • And the behavioral component. • The math is the easy part. We’ve done that here today. Now you just need to get your behavior to fall in line with what you know.

28. View this presentation and other helpful material at: http://extension.ag.uidaho.edu/madison