How to Manage your “Bank” Properly
Recently I had an important conversation with one of my Money Mastery Coaching™ clients that can help all of us. This client asked me how to handle unexpected expenses and told me about his broken HVAC system. Home ownership is a great thing for building wealth, but also comes with challenges. For this reason, when I visit with new homeowners experiencing euphoria before challenges hit, I like to prepare them so they can laugh instead of cry when reality finally sinks in.
Unexpected home emergencies (or any other financial emergencies for that matter) like a broken HVAC system can cause serious strains on well-laid plans, especially if you’re trying to figure out how to pay for them without setting back your long-term financial goals. If you have a strategy for situations like this, you can avoid this stress. Let me share with you some tips I gave my clients on how to approach this situation and make the best decisions for his long-term financial growth.
First, some context: my client knew it would be between $8-12k to replace his HVAC system. He has also invested in whole life insurance policies that are a great tax advantaged vehicle for building long-term and generational wealth and security (more about this another time), so he wanted to know if he should use a loan against his life insurance policy cash values for the repairs or just pay in cash. He had been doing the right thing by funding his emergency reserves and his policies to the max and currently was only repaying car loans through it. Because he had options, he wasn’t sure which way to go to stay on track with his goals—a great question!
My answer was that typically my first objective with surplus cash is to be able to max fund my life insurance policies. So, I had him look at the date of his next premiums coming due and project from there his surplus cash flow. I wanted to be sure he would be highly likely to max fund his base and PUA premiums (which is a guaranteed permanent, and stands for “paid-up additional life insurance”—if you want more information about this type of strategy feel free to schedule a call with me). I reminded him that this should always be his priority.
Next, I explained that if using cash from savings won’t negatively impact the ability to fund policies, I suggested it would be ok to use cash to pay for the HVAC replacement. However, and this is the key, it’s super important to be an “honest banker” with yourself and create a repayment plan for your cash so you can replenish the funds you used quickly.
To help with making an “honest banker” repayment plan, a good online calculator is found at www.calculator.net. Select the amortization calculator on the site and then plug in the $10k or whatever the final number is of the cash you used. Then pick a time frame to repay yourself (say 24 months – 36 months), then pick an interest rate like the bank would charge (7% or so), and then calculate the payment plan. Voila! You have your repayment schedule, and you are acting as your own bank on this transaction. THIS IS AN ABSOLUTE MUST!
This process of planning to pay back money used for emergencies or major purchases is a major oversight for people in general and something I emphasize in my Money Mastery Coaching™ programs. People often choose to pay cash and have a sense that cash has no value, but it really does. Cash is what gives us opportunities to take advantage of investments. Cash gives us peace of mind when it is plentiful. Cash can earn interest in the bank or other investments. Cash is hugely valuable, so make sure you’re using it wisely.
Handling emergency expenses like a broken HVAC system can be stressful, but by having a plan and following these steps to prioritizing your financial goals, you’ll be able to make the best decision for your situation and have peace of mind.
If you have any questions about your own financial situation, whether an unexpected big expense has come up, or you’d simply like to have support with your long term plan, reach out to me. I’d love to have you schedule a free consultation. Teaching as a coach with Money Mastery Coaching™ is my passion, and I am here to help.
