Questions? © 2012 Matthew S. Whiting 1 Wk 2

1. Balance the budget 2. Establish short-term emergency fund 3. Pay off consumer debt 4. Establish long-term emergency fund 5. Develop “large purchase” savings plan 6. Pay off mortgage 7. Save for retirement 8. Save for college 9. Invest the surplus 10. Share the surplus 2 © 2012 Matthew S. Whiting Wk 3

Definitions vary, but for our discussion consumer debt is non-mortgage debt: Auto loans Credit card debt HELOC Any other debt 3 © 2012 Matthew S. Whiting Wk 3

The mathematically optimal way Pay the minimum amount required on all accounts Pay extra on the account with the highest interest rate until it is paid off, then move to remaining account with the new highest interest rate The psychologically optimal way Pay the minimum amount required on all accounts Pay extra on the account with the smallest balance until it is paid off, then move to the remaining account with the smallest balance 4 © 2012 Matthew S. Whiting Wk 3

The mathematically optimal way Pro – Reduces total debt the fastest Con – May feel longer if highest interest account has a very large balance The psychologically optimal way Pro – Feels like progress is being made as there are fewer accounts with outstanding balances Con – Will take longer in the end as more total interest is paid on the outstanding debt. 5 © 2012 Matthew S. Whiting Wk 3

Credit Card #1 18% $1,000 Credit Card #2 12% $500 Credit Card #3 6% $200 $1,700 total debt 6 © 2012 Matthew S. Whiting Wk 3

$50/month is available to service this debt Math Optimal Credit Card #1 18%) – minimum payment + remainder of the $50 in this budget category Credit Card #2 12%) – minimum payment Credit Card #3 6%) – minimum payment Psych Optimal Credit Card #3 6%) – minimum payment + remainder of the $50 in this budget category Credit Card #2 12%) – minimum payment Credit Card #1 18%) – minimum payment 7 © 2012 Matthew S. Whiting Wk 3

Math Optimal Credit Card #1 18%) – 33 month payoff Credit Card #2 12%) – 41 month payoff Credit Card #3 6%) – 44 month payoff $2,171 total amount paid ($471 in interest) Psych Optimal Credit Card #3 6%) – 13 month payoff Credit Card #2 12%) – 29 month payoff Credit Card #1 18%) – 46 month payoff $2,286 total amount paid ($586 in interest) Math Optimal saves 2 months and $115 (7% of total initial debt) 8 © 2012 Matthew S. Whiting Wk 3

The elimination of consumer debt frees up a substantial monthly surplus The amount being paid on the debt principal… And the amount being paid on interest and finance charges! This surplus will now be used to fund step 4 – Long-term Emergency Fund 9 © 2012 Matthew S. Whiting Wk 3

1. Balance the budget 2. Establish short-term emergency fund 3. Pay off consumer debt 4. Establish long-term emergency fund 5. Develop “large purchase” savings plan 6. Pay off mortgage 7. Save for retirement 8. Save for college 9. Invest the surplus 10. Share the surplus 10 © 2012 Matthew S. Whiting Wk 3

This emergency fund will expand the short- term fund ($1,000) into a larger fund which then supersedes the short-term fund General recommendation is 3 – 6 months of either total monthly expenses or total monthly wages/salary. 3 months of living expenses is the least conservative fund and 6 months of wages is the most conservative. 11 © 2012 Matthew S. Whiting Wk 3

This emergency fund will cover the items mentioned under the short-term fund such as car repairs, appliance repairs, minor medical, etc.) and … Will cover more serious issues such as job loss, more significant medical problems, house fire, etc. 12 © 2012 Matthew S. Whiting Wk 3

As with the original short-term fund, this fund should be readily available (liquid) There are few good options for this money in today’s economy and are largely identical to those listed for the short-term fund Savings account Money market account CDs as long as the early cash-out penalty is small 13 © 2012 Matthew S. Whiting Wk 3

The establishment of the long-term emergency fund frees up a substantial monthly surplus… … and removes much worry about finances This surplus will now be used to fund step 5 – Large Purchase Savings 14 © 2012 Matthew S. Whiting Wk 3

15 Wk 3 © 2012 Matthew S. Whiting Balanced the budget Established a short-term emergency fund Pay off consumer debt Establish long-term emergency fund

Questions? © 2012 Matthew S. Whiting 16 Wk 3