Prepare for Financial Emergencies

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1. Manage Spending2. Prevent Financial Emergencies3. Become Debt Free4. Prepare For Retirement5. Teach Kids About Money6. Own a Home7. Build a Legacy 

Oh no! Now what?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?

Irregular & Emergency Irregular & Emergency ExpensesExpenses

Medical Dental Utilities Education Job Loss

Vehicle Maintenance

Accidents Gifts Kids

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Everyone must have a Everyone must have a financial emergency plan financial emergency plan

Savings plan Credit/debt plan

What plan are you in?

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What is emergency savings?What is emergency savings? 3 to 6 months worth of expenses Accessible

But not so accessible that you use it for non-emergencies

*High yield (APY)

Try an out-of-town bank. Online bank.

Don’t carry cards to this account.

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$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 An emergency fund works for youfor 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?

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DebtDebt, as an emergency plan , as an emergency plan works works against youagainst 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.

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With an emergency fund: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 interestCompound interest

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

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Difference: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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Why donWhy don’’t people do it?t people do it? It takes planning and some self

discipline . . . But not a lot! 1) Make it a priority 2) Make it automatic

You may feel that you canYou may feel that you can’’t t afford an emergency fund.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!

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How to build How to build an emergency fund. 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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How ?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

How long will it take How long will it take (saving 10% every month)?(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 Should I dip into my 401(k) or IRA? 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!!!20

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It can help It can help reduce costs in reduce costs in other areas of your lifeother 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!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!

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The system is the secret.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 Personal Finance has two components: 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.