Wealth from Wisdom

How Much is Enough? Understanding Your Emergency Fund Needs

October 12, 2019
Wealth from Wisdom
How Much is Enough? Understanding Your Emergency Fund Needs
Chapters
Wealth from Wisdom
How Much is Enough? Understanding Your Emergency Fund Needs
Oct 12, 2019
Carson Wealth

Medical emergencies. Car accidents and repairs. Lay-offs. A busted water heater. We have no idea what will come our way, we just know that something eventually will. Unforeseen expenses can throw off your financial plan – for the short-term and long-term.

A healthy emergency fund is a vital part of every financial plan. It’s there to cover urgent expenses, alleviate risk, and untether other funds to invest. But not all emergency funds are created equal.

On this episode of Wealth from Wisdom, we’ll discuss emergency funds, rainy day money, cash under the mattress – whatever you call it, it’s an important part of your overall financial plan. Let’s look at how big this fund should be, how to grow it, when to spend it and what to do if you run out. 



Show Notes Transcript

Medical emergencies. Car accidents and repairs. Lay-offs. A busted water heater. We have no idea what will come our way, we just know that something eventually will. Unforeseen expenses can throw off your financial plan – for the short-term and long-term.

A healthy emergency fund is a vital part of every financial plan. It’s there to cover urgent expenses, alleviate risk, and untether other funds to invest. But not all emergency funds are created equal.

On this episode of Wealth from Wisdom, we’ll discuss emergency funds, rainy day money, cash under the mattress – whatever you call it, it’s an important part of your overall financial plan. Let’s look at how big this fund should be, how to grow it, when to spend it and what to do if you run out. 



Speaker 1:
0:00
Okay, and here's the legal mumbo jumbo. The opinions voiced in wealth from wisdom with Ron Carson are for general information only and are not intended to provide specific advice or recommendations for any individual to determine what is appropriate for you. Consulted, qualified professional. All indices are unmanaged and may not be invested into directly. Investing involves risk including possible loss of principle, no strategy or success or protects from loss. Past performance is no guarantee of future results. Advisory services offered through CW, an LLC, an sec registered investment advisor.
Speaker 2:
0:30
The stock market hit another all time records $10 billion in social security benefits go unclaimed every single year. The federal reserve announced that they will raise interest rates by 250,000 rocketing cost of healthcare and retirement could now run 350,000 you've worked hard and saved for retirement. That's great, but it's what you do with that money that really matters. Welcome to wealth from wisdom with Carson wealth. Carson wealth is a Barron's hall of fame advisor at recognized by Forbes magazine as one of America's top wealth advisors and they're right here in Omaha. This is where you can count on straightforward and objective advice that can help you make the most out of every dollar you've saved for retirement. Welcome to wealth from wisdom with Carson wealth. As we think back
Speaker 3:
1:14
over our lifetime, there's always a moment, a moment when something happened in your life that you can easily picture where you were probably even potentially what you were wearing, how it made you feel. I know mom, it's for me nine 11 I think most of us can picture where we were in what was happening. The birth of a child, where you were at the hospital, the feeling of stress or anxiety or happiness. Many other things in life. Maybe you got a phone call, the loss of a loved one. Maybe it was joy your kid got into the college they wanted, but all of us have those moments in life, but we prepare for often the good ones, but we often don't prepare well enough for the emergencies or the challenges, whether our medical emergency, a car accident, car repairs, which we all know are not fun layoffs.
Speaker 3:
2:14
Maybe your company is going through a buyout and something you need to consider. You never thought early retirement was an option, but it's on the table and should you think about it or if you're to deal with the dreaded busted water heater or water backflow. I know I've talked about that even on this show. We really have no idea what's gonna come our way. What we do know though is eventually something will, the life can't just go humming along peaceful forever. There's always going to be a bump in the road or for those of us that live in Omaha, Nebraska, a pothole that could exist at some standpoint and unforeseen expenses and circumstances can throw off your financial plan both for the short run and the long run. Hey, welcome to wealth from wisdom. This is Paul. Today I'm joined by Aaron Wood or vice president financial planning.
Speaker 3:
3:02
Aaron, welcome back to the show. Thanks for having me again. Yeah. So today we are going to talk about is planning for unintended life events. And we know a healthy emergency fund is a vital part of every financial plan is really there to cover your expenses, alleviate risk, and really untether other funds to invest. But not all emergency funds are created equal in terms of dollars or what is needed. And today we're going to spend some time talking about all of these critical things you need to think about. What are other terms for it? Rainy day funds, cash under the mattress, whatever you're going to call it here. It's an important part of your overall financial plan. So let's talk today about how big this fund should be. How should we grow it? How should we invest it, when to spend it, where to spend it. And what do you do if it runs out, where do you go next? So, Aaron, I mean as we look at financial planning, a lot of people always think, uh, the world is going to be sunny. Oh, of course. They don't see it as partly cloudy or cloudy or rainy or historic rainfall.
Speaker 4:
4:09
Well, someone else is always going to have an emergency. You're always going to have the positive, right? Like we don't ever consider our lives to be the person who the emergency is going to happen to. That's always somebody else. Um, but the truth is, you know, we need to be prepared. Um, and I like to say emergencies are opportunities, uh, because when you tell someone it's both, uh, they tend to think of that positive one and they're more likely to want to save for those.
Speaker 3:
4:31
Yeah. And I put people in two camps of, Hey, they don't think anything's going to happen to me or the people that think that everything happens to them and they're the, I call them the negative Nellies out there, uh, that at the end of the day, bad things are gonna happen. But guess what? You fix it and you move on. You just, I hope, hope everyone understands wealth from wisdom is realizing that everything happens at a step in time and you just go onto the next stage, the next chapter, the next phase of your journey here on life. And you have to figure it out. So let's talk about how much do I actually need Aaron. I mean, when somebody says this, this generic crash, it happens all the time. Aaron, how much do I need in my emergency?
Speaker 4:
5:09
Yeah, the general rule is three to six months of your expenses, but it does depend on you. Uh, you really do have to look at your own situation. If you are a business owner and there's other people relying on you and that your income is as affecting other individuals, you're gonna want that to be higher. Uh, you know, if you're just starting out, three to six months of expenses can seem way too big and too far in the future to even think about. So you want to bite size that and start at smaller so that you can just start where you are and start building it. But give yourself a goal, uh, to get, if you're starting at, you know, zero, give yourself a goal to get to a thousand or 5,000 in a certain amount of time and then work to that three to six months.
Speaker 3:
5:49
Yeah. And it's not that simple. So yeah, if you're just starting out, you don't have one or you know what, you got into some debt problems. Hey, life happens by the way, that's emergencies do when they called you to take out debt. So now you're debt free. What I mean is more like a high interest rate debt, free credit cards. I actually think mortgages and using leverage from alone is a good thing. It's a healthy thing for your financial situation, especially in today's historically low interest rate environments. But when you now can start saving so simple things of just putting away paycheck comes in $50 $500 $5,000 whatever the number is right for you immediately transferring it into a bank account, getting it out of there so you don't spend it is so important. And Aaron, can I add one thing to that? A bank account that you don't have necessarily electronic access to.
Speaker 3:
6:42
There are many people who go and you know, connect their savings account to their checking account and every or debit card or you know, and then something little happens and it's not really the emergency, it's the, Oh, I saw this on sale, or Oh I, I wanted to take this extra vacation. Uh, it's one thing to plan for those and take them out. But it's another thing to keep dipping into that savings when it really is not that emergency. And so having an account that is outside your normal checking account or maybe even at a different bank that's a little bit harder to access is a good thing for people to just take that one more step away from instant access on it. Yeah. And for those of us that have children that are going into the workforce, so I have twin 16 year olds I've talked about frequent on the show.
Speaker 3:
7:26
Uh, so my daughter gets paid and it goes directly onto her debit card while we immediately transfer the majority of it then to a bank account of which she cannot withdraw from easily. Nice. Yeah. So that way it's forced savings. It's forced creating it and therefore they're not going out and spending extra at Panera or other locations like that. But three to six months, I mean, Aaron, that's a huge range. I made people think about, okay, if I'm making $120,000 a year in my household a, and so that means I need $60,000 or $30,000 that's a huge difference. Yup. Now remind you, I did say of expenses, I'm not necessarily of income because those are different. If something happens to you, there are places that you could naturally cut off from the top. So if you're saving 15 20% into your savings, you know, in tier four oneK or into these additional savings account, if you hit a true emergency, you could stop those savings and so whatever those savings amounts are, that's not the expense that we're looking at.
Speaker 3:
8:31
So three to six months of expenses is really the focus. Yeah. And I think another, I'm going to call it a rule of thumb, but doesn't it mean it's a rule that everybody needs to abide by, is if you have two income earners in your household, three months is often okay. Because really if you take three times two, you get six. It's just doing some complicated math there. But if you're a single income earner and your risk is a little greater of you being laid off or you being disabled or whatever potentially happens or 40 in that air conditioner that goes out. So six months is often a better rule of thumb for an individual person. So when we think about that, you know, how often, um, should we consider the, does life insurance, um, come into play on this? So when we think about M and a, by the way, if you go to a life insurance agent who only sells life insurance, they are most likely not operating as a fiduciary.
Speaker 3:
9:30
So what are they gonna do? Well, you need the most you can possibly get approved for. Yes. So that doesn't mean it's right. So here's the word I'm going to use with all of you. You need the optimal amount. I actually view life insurance as a good vehicle, but you need an optimal, not the maximum, not the minimum, but if you work with a financial planner or trusted fiduciary, they're going to help you determine what the optimal amount is. And by the way, they're also going to help you look at multiple carriers. If you only go to Prudential or you only go to Northwestern mutual, what are they going to offer you? What they have their products which are going to benefit who them, not you as the consumer, but it's so fascinating to me. Tell a quick story here. Aaron is working with a family right now.
Speaker 3:
10:16
They were working with one of those companies I just mentioned and they got the list of, Hey, here's how much term insurance you need and here's how much permanent. Well, they provided us a copy of it. We then took it to market. What happened? Got very different results back, very different results for the same amount of insurance, yet reduce their premiums by a significant amount. Who wins there? Well the client is winning for sure. For sure the consumer wins because it's gone to the marketplace in terms of having 20 plus carriers bid on it and, and that's the point. That's why firms like Carson who are registered investment advisory firms who have a fiduciary responsibility are going to help them think through what's the optimal amount of insurance and why bring up insurances is you have to at least understand how much insurance you have.
Speaker 3:
11:10
These part of the emergency fund is if one of you passes away and really the main vehicle of emergency then becomes life insurance for you at that standpoint. And the other insurance falls in this too because they all have deductibles. And so one thing we want to make sure is covered in these emergency funds is your deductibles. If you're in a car accident, a, if you have some type of health event, you know we talked about the HSA is and FSAs frequently those are all part of that emergency fund you need to be planning for. Yeah. And so you're like why are you talking about this today from wealth and wisdom? I got this covered, Paul, I'd actually challenge you if I went and looked at your bank account right now. So here, here's a, here's a stat. 46% of people in the United States do not have an emergency fund that could even cover up to three months expenses.
Speaker 3:
11:54
So why don't we talk about it half. That's almost half of you today. Don't have it. I actually Aaron, um, with challenges, probably even a little bit more than that. In today's world, people are spending more or seen that. Uh, and they're really looking at that. I mean, there's [inaudible] and by the way, this can be millionaires too. I actually just saw recently there's 10.4 million people in the United States that are millionaires, 10.4 million. But they, they figured out along the way that they need an emergency fund. Most of them did. Certainly not all of them, but I think something that's cool is that they figured out saving is important and starting early. So we actually created a guide. It's called seven secrets to accumulating your first million. If you'd like it, you can go to our website, Carson, wealth.com it's right there and you can download it. Learn seven secrets to accumulate your first million or hit connect with us and we're happy to send it to you. You're listening to wealth from wisdom.
Speaker 2:
12:49
Do you own an annuity? Inflated fees and commissions could be costing you an arm and a leg. Get straightforward and objective advice from Carson wealth by calling. (888) 419-8513 are you caring for an aging parent? Are you concerned about the skyrocketing cost of healthcare and longterm care? Or do you have questions about how to best manage an inheritance? We can help call Carson wealth today at (888) 419-8513 and now back to wealth from wisdom with Carson wealth.
Speaker 3:
13:20
You're listening to wealth from wisdom. Paul West joined by Aaron Wood. Today we're talking about when life throws you curve balls. Uh, when you get lemons instead of lemonade or you haven't made the lemonade yet out of what you've experienced. Poor talking about how to be smart. And that's the whole point about wealth from wisdom here is it's a combination of every little thing you do that adds up to your success. There's this little phrase in finance that you're taught, is it finance or finance? I like finance. You like finance. I like finance. So we can disagree on that. Yeah, it depends where you're from. Potato Patato so, but when we, there's this phrase called compound interest and it's one of the most simple things that exists in the world, but not everyone understands it. But an easy thing to figure out too is the value of saving automatically and being smart about it and protecting yourself and saving and creating an emergency fund is one of the most, you know, really I would call realistic and simplistic things you can do, but people avoid.
Speaker 3:
14:25
But the smartest people figured that out. Like you gotta protect yourself first. You can't worry about buying a boat or that second home or paying everything for your kids. You gotta protect yourself first and you hear it from us frequently. We talk about investing in your own retirement plan, at least Maxine out your match. You get from your employer, but even, you know, equivalent to that is just maxing out your emergency fund to the level you want to get it to. So you have that three to six months cause I live in a house that was built in the 1970s so what's going to tend to happen? You're going to have all sorts of stuff that needs repaired, your roofs, new age back, possibly some new plumbing somewhere new. Let's turn a $400 fixes. No, I would imagine not. No. And what about cars? So once you drive a car, I mean I was just thinking about this the other day, um, you know, once a car starts breaking down it becomes a domino effect, right?
Speaker 3:
15:19
And when you take your car to be fixed, how often do you get out of there for less than $250? Well it, it costs you like $50 for an oil change anymore. Like those are one of those things that in once they start, they do, they, they seem to just keep popping up. It starts with the brakes and now you need to transmission. And now you need, you know, new fuel line. I dunno. It's never ending. Yeah. Well I mean, what if you have medical bills that all started, you don't have enough in a health savings account or your flexible spending account, then what do you do? We're going to start grabbing from an emergency fund. You absolutely do. And you know, so much of this, again, we talked about this in the first segment is we don't think these things are going to happen to us, but why?
Speaker 3:
16:00
When they happen to someone in your family or someone you're close to? I mean, I remember when I was in my twenties my mother was diagnosed with cancer and I did not live here. And so I was flying back way more than I normally would have. I was coming back, you know, every couple of weeks to make sure I was going with her to appointments and surgeries. And that was a year that I didn't think I was going to be flying every couple of weeks, but I did a, and so it wasn't necessarily my emergency, but it was my family and I love them. And I want to be there and we all have those. And so being prepared for those things so that you can be involved, uh, when you need to. Yeah, it's a great point. I mean, so you're going back to help, help with health issues and a lot of people experienced that and working with their parents.
Speaker 3:
16:42
Uh, but sometimes it's you have a funeral to go to and I live here in Omaha, but if I went out earlier this year, my aunt passed away. And when you go look at flights, yes, you don't have a choice cause you're going to go, right. Yes. You can call the airlines, um, which everyone should know this. If they've not had this happen, call the airlines directly. Let them know that you do have a funeral. Then most of the airlines do have some issue about a 10% discount is what they'll do for a bereavement rate is what they'll do. So, uh, that was interesting is so all of a sudden, okay, I need to be somewhere in 48 hours is, you know, last minute flights are not. No, they're not cheap at all. At all. So actually I thought I was getting a deal getting a flight for six something.
Speaker 3:
17:24
Yeah. Yeah. But I mean, you imagine right now or you and your husband or me and my wife saying, Hey, let's go somewhere and we want to spend $600 to fly in the United States. Per person. Yeah. Per person. Not first-class or anything like that. We'd probably be like, ah, we're going to hold off. That sounds pretty expensive. At that point I'm like, well, there's a lot better than 800 900 the mean some the, some of the options were easily in the low one thousands but if that was all there was, what would I have done? He would've paid it. I would've paid it. Cause you didn't have a choice at that point in time. And those are the emergencies that come up in life and you never know, uh, what's going to happen. And you have to think about it and put it there and then put it in a way that, uh, you don't cheat on it. Right. You don't say, you know what? Our family wants to go on a vacation to Chicago this weekend, we're going to go have fun. We're going to go to a Cubs game or a bears game where, and all of a sudden you drop $2,000.
Speaker 4:
18:21
[inaudible] and how often do we see that? I mean, we have individuals who've worked really hard to accumulate these, these stage one emergency funds is what I call them. And they get so excited because the first time they have this emergency fund and they do, all of a sudden we find out, Oh, I accumulated 5,000 and now we're going to Chicago this weekend. Uh, that is really a, we're working with an advisor and that behavioral, um, piece of it, helping them say, this was stage one. Uh, now how do we help you work on to stage two emergency funds.
Speaker 3:
18:50
Yeah. And a lot of people think, uh, emergency funds and savings are the same. And actually I will tell you, and it's pretty cool now, uh, what I would say is a lot of your banks allow you to name your accounts. So I wouldn't you actually name it as emergency fund? Yeah. Because why not just call it what it is, but also it'll help psychologically. You want to spend that money on that Chicago weekend getaway named as emergency. You're going to be less likely to pull it out of there.
Speaker 4:
19:20
Yup. Now, if you want that, that travel fund, same thing, have an account for that and name it your vacation fund or a name at your Chicago fund. Uh, there's a really cool truck. We're not talking about education funding today. Uh, but there's all sorts of studies that if you put your child's picture, uh, next to that savings that you're doing in their education account, you'll actually increase the amount of savings. And so the same thing's true if you want a vacation, um, that would be an opportunity, but name it, put a picture next to it and save towards it.
Speaker 3:
19:47
Yeah, I liked that a lot. That reminds me, Aaron, you've done something that's really interesting. You had a really nice article, a recently, you've used postcards with clients, so can you tell me about that?
Speaker 4:
19:58
Yeah, so I have a deco, it's probably about a hundred postcards. It's changed over the years. As I say, they're random pitchers. Uh, but what it is is they're visually ways to help clients of find something that, uh, impacts them or, uh, you know, has that strong emotion that yes, this picture is what I see for my future. And so I go through that with clients and have them go through the stack and find five that represent what they want their future to look like. And then we talk about them. Uh, for a lot of clients, the word retirement or future can be very vague. And so having that visual anchor to what are your values and what is the idea in your head and seeing it in real life is really helpful. And then we use that on an ongoing basis to keep that focused on, uh, getting to that future. Uh, it has been such a big difference I would for clients versus
Speaker 3:
20:48
just asking them a simple question, uh, to helping them see their future, what they really want and how do we get there. Yep. And I think it's an importantly when I started this show today and I said, Hey, visualize where you were when nine 11 happened. Uh, I mean, I can picture distinctly where I was. I was working at a firm called securities America at the time. Uh, we were based on the fourth floor. We were in the, let me think about this. We were in the Southwest corner was where our division was. I mean, I can just picture exactly where I was. Uh, when that transpired. It's very visual to me. I don't really remember like the words were said, but I can remember the emotion and visualization that comes with it. I love the idea at great take home for our listeners today, if you have the ability on your accounts to actually add a picture, put in a picture of your savings account and why you're saving for it, your children, for their education, whether it's for a vacation and put a picture of Chicago or whatever reason you're doing it, the visual elements help and it part of the Carson group.
Speaker 3:
21:48
Um, you know, we've had some great opportunities to meet some really interesting people across the country. We do an event every year called Excel. I'm helping teach professionals to get better in communicating with great consumers like all of our listeners. So earlier this year we had a chance to um, to meet mirror wheelchairs. So Mira, uh, runs a company called cocoa labs. What they basically do is use data and use data to help figure out, um, solutions for problems, uh, but equally they're taking the great ideas and minds at MIT, letting them start in, incubate businesses at Cogo labs before they're ready to become CEOs. And Aaron, I shared this with you because I had the chance to interview Mira in a one-on-one fireside chat in front of other CEOs. I know you were present in this room as well, but something she said sticks in my brain.
Speaker 3:
22:41
I know you're probably gonna grant cause you've heard it from me before. I need it, but it, it's repetition for your memory, but also for our listeners. So when you hear something versus you see something, how much more likely are you to remember it? If you hear it versus you see it, and I know you're going to tell us the numbers. I know the answers. See you see things, but I can't remember what the micro bits that she says. Yeah. So she still, she shared just a fascinating statistic. So we all can remember things visually, like where are we? We're on nine 11. Um, we can remember images of something that's fearful of a car accident or whatever has happened. But now there's empirical evidence from your, a shared the following your brain via your eyes. So when you see something, you process information that eight megabits per second I saw a lot.
Speaker 3:
23:35
Right? But your ears, your, your audit audio or auditory, if I'm saying that correctly, please, any ear specialists correct me for my maybe incorrect usage of the language there. You only process it at 0.8 megabytes per second. So what did the scene is you remember, or your or your brain processes information 10 X faster. So 10 times faster seeing something than hearing it. That's why that picture of your child on your savings account, you're going to remember to contribute. Yeah. That's why, uh, when we, in financial planning, we're not just telling you something, we're showing you it on our computer screen. We're showing you the impact. We're editing, we're updating, we're making adjustments because we want your brain to comprehend. If I say, Aaron, you need to save more. Yeah. That doesn't mean anything. And you agree. Yep. Yes I do. And you leave here and you're, what do you do?
Speaker 3:
24:28
Nothing. Well, of course not. Yeah, no, most likely, most people won't. But if I show it to you and show you the impact and show you, if you don't do it, what happens then what do you do? Oh, absolutely. When we connect those visuals and those goals and values all together, and the client leaves here with a really clear picture of how they get to where they want to be. And that's the part that's really key to all of this, is they, they see the path that's important to them and we're helping them stay on that path and get there. Yeah. So I want you to visually look at, Hey, when's the last time you sat down with your financial planner and did they go through those things? Did they visually show you what it looks like because it is going to be most impactful for you. Hey, we're going to be back in a moment. We're talking about great ideas to help make sure you're planning for your future here on wealth.
Speaker 2:
25:16
Any major decision in life is worth getting a second opinion and financial planning is no exception. Let's talk about how you could make your money go further in retirement than you ever thought possible. Call Carson wealth. Just schedule your free initial analysis now at (888) 419-8513 do you have a lot of assets but are short on cash? Learn how you could leverage your assets to free up cash with Carson wealth by calling (888) 419-8513 and now back to wealth from wisdom with Carson wealth.
Speaker 3:
25:49
Hey, welcome back to wealth from wisdom. This is Paul [inaudible] joined today by Aaron Wood, our vice president of financial planning. So Erin, I'm going to ask you a question. What's my least favorite B word? The letter B. Busy. Busy. Yes. I hate the word busy. I've already talked about on the show, everyone wants to tell you why they're so darn busy where there's another B word that many people hate when it relates to their finances. And that is budget. Oh yes, the dreaded B word there. Budget, budget, budget, budget. Some of you are cringing right now or wanting to turn off the show because you want to ignore it. And I really put people in two categories here. So there's the, uh, people who are the ignores and just want to see am I positive or negative for the month. They're not going to go down to the penny.
Speaker 3:
26:35
But then you also have your penny people that they absolutely know each month how much they're spending. And it's usually meticulous. They're still people that actually use a ledger in a checkbook. They're absolutely all right. They're out. So people fall in one of those two categories. And I'm not saying one's better than the other. I certainly would like you to budget, but I'm not saying you have to go to that nth degree, but you, you do need to think about how you utilize and build your emergency fund from a budget. So one of your light items needs to be funding an emergency fund. Absolutely. That funding an emergency fund, funding your savings, all of those things that they need to be the first thing on your budget. Yeah. So how many of you are listening right now? Say, Oh, I'm going to get to that. Well, yeah, if you're, if you, if you are a person who does not typically budget or doesn't have a spending plan, uh, it seems very daunting to most of them.
Speaker 3:
27:29
And so they need to take that step of how do I do this? And then easy way, um, and that easy way is to start at the high level. You can't go from zero to a thousand in this situation. You're not going to go from a absolute non budgeter to I'm going to budget every penny. And so doing those high level things, here's, you know, the total income. Here's the total savings. Here's what the total expenses are and start there and then drill down over time. Yeah. So Erin, I'm going to completely switch topics on you for a second. So can you recite like where was your last meal, where you went out to eat? Oh my goodness. Um, this pen arrow being delivered to your account. Okay, well close off your last meal that, that won't say out to you, but we'll, okay, we'll, we'll door dash it there.
Speaker 3:
28:12
All right. So when we think about food and we ask people about their most recent food experience, they go think about what they did, what they liked, what they didn't like, how it tasted, where they had to, that, what their company was. But it's, it's, you always recall your most recent experience, but just probably why I could only think of Panera. I was here yesterday that Jesse my point proven. But then I also think about if you're somebody who said, Oh, I'll get to this, what do you rile on him? Your most recent experience, which was delay, procrastination or anything like that. But I want to remind you, we're operating in a very interesting time. We are way, way, way past historical norms on a downturn in the economy and a downturn in the stock market. So you have an Aaron I know you, congrats, get undertake certificate and behavioral planning. So there's this bias called recency bias. So people tend to believe in what's recently happened and associated with everything. Yup. So my problem with that is, is if you're a procrastinator and you've gotten away with it, [inaudible] what are you doing? Yeah, it's, it's going to happen, um, when we never have that crystal ball. Um, but for the individuals who have been on this upward, you know, momentum that we've had behind us for awhile now, uh, they, they've gotten by with it. And
Speaker 4:
29:42
unfortunately, it wasn't that long ago that we were in a big recession and people were losing jobs and, you know, houses were overpriced and people were being foreclosed on. Uh, it's very quick how people's minds have went from that, um, to this. Now, everything is great. Um, but these things happen in cycles and we will always have the next cycle. We just don't know when. And so helping people realize that they are maybe in this bias that they didn't normally, uh, pay attention to and helping them recognize that and then keeping them on that path to try and focus on, okay, this is how we got you out of that situation last time. Let's make sure we don't get you into that situation this time.
Speaker 3:
30:22
Yeah, for sure. And I think because we've had a good, uh, we're in a good part of the economic cycle and we haven't had a major downturn. Those of you that are saving enough or contributed enough to your emergency fund or your far Ronk just feel like, Oh, this is never going to end. Well, guess what? You're wrong. I don't know when you're going to be wrong, but you're wrong. I just want, I want you to know that right now, but think about some time in your life that you had put something off and you finally got it done. And a lot of people is like, yard work. I finally got this part of my yard fixed, or I did that, or I got our finally updated my basement, or finally got that nasty old wallpaper out of the kids' bathroom. Yup. I finally put a fireplace in my basement and we've lived there for five years. And it was the biggest victory. Yeah. Yeah. So how did you feel when you were done? You just used the word victory.
Speaker 4:
31:14
It was a victory. You know, it's five years. I, I'm cold, I hate going in the basement and we never use the family room because I refused to go down there and freeze. And so then it's this room that we have and we don't use and it's just a sore point. Right. It annoys you. And now that it's done, I feel so victorious that I'm going to use the room no matter what I'm using that room.
Speaker 3:
31:34
Yeah. And it was a, a delay tactic you took for a long time. So five years. And we all have that by the way. So, uh, but the feeling you get, and I would say the same, um, now if you haven't done for emergency fund, I actually would recommend you do it. So it actually hurts you a little bit. And I know it sounds weird, but I want, I want it to hurt because you need to experience the pain, the pain to realize the gain you're going to get that goes along with it. Why do you work out? You have pain, right? But you get the gain of you're, you feel better, you're healthier, you relieve stress, look good. All of those things that go with it. But I, I sh I share with people that sometimes do frivolous spending. You do need to save.
Speaker 3:
32:20
Do you really need that hot tub? Do you really need to go out to dinner? Those extra two times a month, whatever it would be. And I mean, this stat just, this is from Kiplinger's in July here of 2019 more than half of American households have less than a thousand dollars in emergency savings. So again, like you're listening today, you're one st Paul, I got plenty in savings. Why are you talking about this? Or two? You're ignoring me because you don't want to confront and face the truth. You need to look yourself in the mirror. I mean, that's the whole part of wealth wisdom is, is we want to get you to take charge of your life. Um, you're gonna feel better. There's this wonderful part about living free is you make decisions, you move forward with them, and you move on and you're actually gonna feel more liberated even though you maybe feel some pain of not, you know, enjoying that extra cup of coffee or that dinner.
Speaker 3:
33:13
But my gosh, you're going to feel better knowing you've got the right plan in place. Yeah. Well, and let's add onto that. I mean, one of the biggest stressors in everyone's life is money. It causes people to be, um, you know, less functional at work. It causes people to miss work. It causes fights and marriage. We've talked about before. One of the number one reasons for divorce is financial arguments that come up because of the way that two different individuals look at this. So having that emergency fund in place reduces your stress and overall improves your health, uh, leaps and bounds. Uh, it takes so much of that day to day, um, fear or, um, when the emergency happens, the despair that you feel and it really eliminates all of it. So yes, there's that initial pain of, okay, I can't go buy this new outfit or, or I'm not going to go out to eat.
Speaker 3:
34:03
But when you start seeing the longterm positive health events that you're having, uh, people really do get on board with this new lifestyle because they're feeling so much better and it's easier to continue. Yeah. And for those of you that have kids in high school, college, or just graduated from college, this is actually one of the most important things you need to do as a parent is to teach them these lessons. And I will tell you here at Carson, we work with a lot of families and then they're trying to figure out how to educate their children. So we'll actually get on the phone with their children and we'll give them a budget spreadsheet to fill out and we'll teach them, we'll teach them how to put money in their retirement plan, how to put money in their health savings account, how to put money into their emergency fund.
Speaker 3:
34:45
Because what does a parent want to do? I want to teach my kid, you know, when they're young, you're teaching them how to eat at a crawl, how to walk, how to go to school, how to read, how to learn, how to play sports activities. You then teach them how to go to high school and learn to balance hormones. And then yet you get them to college and all of a sudden they're an adult. Will you still want to teach them? It's just different things that you want to teach them how to be a good adult and how to save. So one of the things parents want to do is we all want our kids to be successful. So one of the things we actually give to a lot of our 20 something clients, you know, our, our, our, our parents or grandparents, children or grandchildren is seven secrets to accumulating their first million.
Speaker 3:
35:26
Don't you wanna teach your kids how to get to their first million parents may be accumulated. If you want that from us, it's free. It's online, Carson wealth.com forward slash million or you can just go look on it. You'll see it on there. Or if you want, there's a button, connect with us, ask for the millionaire guide and we'll help send it out giving you those seven secrets to accumulating your first million. You might guess building that emergency fund is an important element of that. Hey, you're listening well from wisdom and we'll be back in a moment.
Speaker 2:
35:52
Have you ever wondered how do other people get away with paying fewer taxes than everyone else? Learn how you could save thousands of dollars in taxes by calling Carson wealth at (888) 419-8513 social security risk, taxes and healthcare. This is where you can count on straightforward and objective advice. On the biggest challenges with investing for retirement. And now back to wealth from wisdom with Carson wealth.
Speaker 3:
36:23
Hey, welcome back to wealth and wisdom. Paul West here with Aaron Wood. Aaron, we've been talking about, uh, a lot of ideas and techniques to building the foundation for your overall financial plan. Um, one element, and there's a lot of elements in today's show. We've been talking about your emergency fund, uh, saving appropriately and being smart about it, but we haven't talked about is when life happens and somehow your emergency fund disappears. Health issue, disability, uh, HVAC unit, um, funeral, whatever it may be. You had to buy a new car, uh, you, you went to the ER, just something happened. I, your emergency fund is gone. What should you do? I mean, any advice for people? Yeah, so there's
Speaker 4:
37:12
always access to some of the other accounts you have if you know how to use them appropriately. Not every account and can you get access to, but what I don't want people to do absolutely the nod. Do not go to the corner where you can do your cash checking, uh, you know, don't go into the place where you're getting, Oh yes. Don't go into the place where they're going to give you the a hundred, $200 and charge you 10,000 and interest. Uh, you know, if it is truly a short term need and you're going to be able to figure out, sometimes they're um, you know, are some low interest credit options. You might have a available to you, but there's a, there's other avenues as well. You really want to make sure that you understand, uh, if you know a true emergency happens, do you have access to possibly your 401k? Uh, do you have the ability possibly to access something from some of your other retirement accounts or your Roth accounts? Those HSA is, we want to go through the list of Europe available options and then look at the options of, okay, what do we do for lending?
Speaker 3:
38:11
Yeah, well I think we have to do what I call a balance sheet inventory. So I can't give a generic recommendation. Say, okay, my emergency fund is out. What do I do next? It depends. It depends. Why do you have, do you have a rollover IRA? Do you ever Roth IRA, do you have a joint account? Do you have a 401k? I mean, Aaron, a technique people can use and they need to be careful about it. But did you know you can actually loan money against your 401k? Yes. Yeah. So do you want to remark on that for a moment or make any comments just so our listeners understand that? Maybe a little bit about the pros and cons? Yes. So you are, most of the plans do allow you to be able to take a loan against your 401k. There's maximums on it. So it's not like you can go in and say, Hey, I need to withdraw the whole 100%.
Speaker 3:
38:57
Um, all of your employers and their documents will have what the rules are for their specific plan. But then you're going to be able to find out what the interest is on that plan and then your repayment terms as well. So you do have to pay it back. You do have to borrow from yourself. But yeah, and you and, and you're gonna pay yourself back that interest. Now what you're giving up of course, is the gains in the market. So even if you have a favorable interest of 5%, and the market's up 18, well you missed out on all of that gain. Um, but it's much better than going out to a loan shark and again, taking out a 20 or 25% loan. And so those are the decisions that will go through and help you think about. Um, but most of the time the two big things on the 401k plan to keep in mind is it, yes, you do have to pay yourself back.
Speaker 3:
39:41
And if you leave that employer, you have to pay that all back immediately. And so it's not a good option for someone who's planning on possibly leaving that employer in the short term. Yeah. So I will say, um, what's the, what's that company that has the easy button that staples, okay, so staples has that easy button. I'm going to, I'm going to caution you now, do not press the easy button. If you, if you need money and you don't have an emergency fund anymore, the easy button for people is CCS credit cards. That's your easy button because you're like, you know what, I just won't pay all of it off. But they're often in double digits. You're in the teens, you're paying 15, 18, 19% or more as a terrible, terrible decision for you. You wouldn't do it. So I'll give you an example. If I put $1,000 on or let's do $10,000 if I put $10,000 on the table that I needed to borrow, and so you slid it across to me, but if I had to pay you a normal borrowing rate of 5% so I slide $500 back to you.
Speaker 3:
40:44
Okay. Right? Because that's my interest payment back to you. Yep. But a credit card is easy. You know, it's plastic. It's in my bill fold. Uh, I get to use it wherever I want and as long as I pay off the minimum, I don't really worry about it. But what you don't see is instead of me paying you $500, I'm paying you $1,800 Oh absolutely. So I'm, I have a $1,300 difference because I pressed the easy button. You know, the easy buttons. Easy for can you get in trouble? Yeah, we'll get in trouble yet yourself, put the credit card companies, they're making it easy for you to build bad behaviors. Yeah. I'm not saying don't use credit cards. I use them all the time. I paid them off in full every month. I like them. I like the points I generate. A lot of you do. Um, there's value in that.
Speaker 3:
41:32
By the way, quick sidebar, if you haven't in your will or your trust listed your digital accounts, meaning like you're Merriot your Hilton, your American airlines or United airlines, et cetera, accounts inside of there. You may be losing out, and I'm not going to go into the details on today's show, but you may be losing out if your spouse passes away or you're the person who has those accounts because there's no way for anyone else to access and they didn't gift it to someone else in the family. And if you don't do that, you could be losing out on thousands or millions of points which have potentially thousands and thousands of value to you and your family. Yeah, sorry for the sidebar there, Erin. But it's an important thing. We see so many people missing their financial plan or their will is not actually listing their airline hotel and other online accounts they have that have some form of point value.
Speaker 3:
42:28
But back to credit cards, just don't use them unless it's just the last resort. Use the loan from your 401k. Look at your other options. I'm going to share a stat here from Investopedia. Why do we bring this up? Because a lot of times on the show, people say, why are you talking about that? Because many of you listeners are impacted. So did you know from September of 2019 right now, 19% of 401k participants have an outstanding loan on their plan. That's one in five. And that is, that's higher than I would've expected. Yeah. But why? Because people are using leverage. They are a in predicaments. But I also, I hope it's because they've reduced their credit card. Yeah. So I hope they're listening cause I would much rather have them take out that 401k loan then
Speaker 4:
43:18
take out the, the higher interest rate one. Yeah. Yeah. You know, it is definitely the better option than versus going to the high interest. Um, but this goes back to those stage one cash reserves for me, I'm going to imagine that most of these are probably $5,000 or less. So your, your kid needs braces. Um, you know, you saw it coming, you saw their teeth when they were there 10 and now they're 12. And so those are some of those stage one cash reserves that when you see these things creeping up, you can either face them head on and start the account to start saving for them. Or you wait those two years and now the dentist says it's time and it's not a huge loan and so you're going into the 401k to get it.
Speaker 3:
43:59
Yeah. Another option is just people do apply for a line of credit. Maybe you have a little more equity into your house than you thought. So maybe having a HELOC, a home equity line of credit doesn't cost you anything unless you draw upon it. Um, also, if you have a securities account people don't realize is you can actually borrow against your securities account. Yes, you cannot. If it's an IRA or retirement, you know, you can for the formal K, but it's different, but you can actually borrow it. Very low interest rate. So that's another vehicle. And another one I want to throw on here
Speaker 4:
44:32
that, uh, is so overlooked is that people don't go back, especially when these health events happen and now one of the spouses isn't working, you really need to go back and look at your taxes. If you can find that, uh, your income is going to be much lower and you're probably going to have health expenses on your next year's taxes when you file them, there's a good chance you can lower the withholding on your other spouses withholdings and increase that cash flow. Yeah,
Speaker 3:
44:59
great point, Aaron. I think we've gone through a lot of great points here today at [inaudible]. Hope our listeners understand there's complexity even as something as simple as an emergency fund. There's a lot of complexities and decisions to make. If you want help with your life's trade-offs decisions, you can schedule an appoint with us, go to Carson wealth.com. Click on connect with us. We're happy to sit down and give you a free consultation to help you think through these things. Hey Aaron, thanks again for joining me. You've been listening to wealth from wisdom
Speaker 5:
45:26
risks, social security, income taxes, estate planning. Every week we talk about how to make your money go further in retirement right here on wealth from wisdom with Barron's hall of fame advisor, Ron Carson.
Speaker 1:
45:39
Okay, and here's the legal mumbo jumbo. The opinions voiced in wealth from wisdom with Ron Carson are for general information only and are not intended to provide specific advice or recommendations for any individual to determine what is appropriate for you. Consult a qualified professional. All indices are unmanaged and may not be invested into directly. Investing involves risk, including possible loss of principle. No strategy assures success or protects from loss. Past performance is no guarantee of future results. Advisory services offered through CW, an LLC, an sec registered investment advisor.
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