Building an Emergency Savings

1
Building an Emergency Savings Renting Vs. Buying
2
This class is only an overview!

• To learn more visit
• extension.ag.uidaho.edu/madison

3
Laws of Financial Freedom
1. Manage Spending 2. Prevent Financial
Emergencies 3. Become Debt Free 4. Prepare
For Retirement 5. Teach Kids About Money 6.
Pay Off Your Home Early 7. Build a Legacy  
4
Everyone has a financial emergency plan

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

5
What is emergency savings?

• 3 to 6 months worth of expenses
• Accessible account
• High yield (APY)

6
Check out savings rates at

• www.savingsaccounts.com

7
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?

8
Debt, as an emergency plan works against you.

• Your car threw a rod and is totaled. Insurance
  doesnt cover it. You need a car to get to work,
  so now you finance it
• Used car 7,000
• Financed for 5 years 1,317

9
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.

10
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

11
Compound interest

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

12
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.

13
Why dont people do it?

• It takes self discipline, and personal
  accountability.

14
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 up do not
• Pay more than minimum payments on your debts.
• Save for retirement
• Save for, or buy a home.

15

• 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.

16
How

• The 10 solution!
• 10 or more of your income until you have the 3
  month minimum.
• After that, you decide. (But make sure you are
  still reaching for the 6 month total.)

17
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.

18
The system is the secret.

• How you use it is not as important as your system
  for paying it back.
• If you emergency saving system is set up to
  replenish itself when used. I dont care how you
  use it.

19
(No Transcript)
20
Which is better?

• Renting?
• or
• Buying?

21
Costs of Renting

• Average cost of renting a 2 bedroom townhouse
  650 including utilities.
• 650 X 12(months) 7,800 (year)

22
Costs of Owning

• 2 bedroom condo, 120,000,
• payment 758.48
• 100 (Tax) -75 (deduction)
• 50 (Ins.)
• 100 (condo fees own maint.)
• 150 (Utilities)
• 1,083.48

• 1,083 X 12 (months)
• 12,996 (year)
• - 1,320 (equity)
• 11,676

23
Difference

• Monthly payments appear to be very close.
• Owning 758 Renting 650
• other costs 325
• Owning 1083 Renting 650
• Diff 433

24
Difference

• Renter take that extra 433 and invest in a
  mutual fund at 10.
• At the end of the year you will have saved/earned
  5,440 in that account.
• So you paid 7,800 that year to rent.
• But you invested and earned 5,440 with money
  that otherwise would have been spent on a condo.

25

• 7,800 - 5,440 2,360 true cost to rent
• True cost to rent 2,360
• True cost to own 11,676
• Cheaper to rent by 9,316

26
Dont ever buy a house?

• No there are many benefits to owning a home.
• Dont get ahead of yourself.
• Make sure you have addressed the other steps
  before you think about buying a home.
• Never buy a home without plans for paying it off
  early.

27
Laws of Financial Freedom
1. Manage Spending 2. Prevent Financial
Emergencies 3. Become Debt Free 4. Prepare
For Retirement 5. Teach Kids About Money 6.
Pay Off Your Home Early 7. Build a Legacy  
28
If you already own -

• Dont sell. Just focus your efforts on the first
  steps
• Then try to pay off your home as early as you can.

29
Personal Finance has two components

• The mathematical component.
• And the behavioral component.
• The math is the easy part. Weve done that here
  today. No you just need to get your behavior to
  fall in line with what you know.