Tuesday, September 2, 2014
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February Financial Fitness Challenge—Reset Your Money Cycle



You have a unique money cycle whether you think about it in those terms or not. And it's worth thinking about, because once you name it you can manage it. Your money cycle is the difference between success and failure for your financial goals.

These four common patterns, or cycles, should sound familiar:

    earn-spend-earn-spend
    This is living paycheck to paycheck, the situation for two-thirds of U.S. households.
    earn-spend-borrow-spend
    This is using debt to support your standard of living.
    earn-spend-save
    This is saving what's left over—which usually means saving nothing.
    earn-save-spend
    This is paying yourself first, focusing on your goals. This is the ideal.

There's a good chance you don't stay in one cycle consistently. You could experience elements of one pattern for a few months, slide into a different one for a few pay periods, then move back to the original cycle.

At different stages of your life, it might even be understandable to maintain a-less-than-ideal money cycle. A college student, for example, is likely to spend a lot of time in the paycheck-to-paycheck cycle, even while making an effort to save some money now and then. That pattern could prevail until you become established in your career.

You might find out that living paycheck to paycheck is the best you can manage for several months after you buy your first house. You might even fall into earn-spend-borrow-spend early in your homeownership phase.

Be aware of what's happening so you don't let those unproductive patterns become your default money cycle. Work toward the earn-save-spend pattern so your goals don't slip away completely.

It can be hard to change an ingrained pattern, but don't be discouraged. The good news is, good habits foster more good habits. Each successful positive step makes you more likely to take more positive steps.

Automate your commitment and your savings cushion will grow.

Ready, set, goals

Two elements will get you on the right path: defining your financial goals and using simple tools to help you reach those goals.

It's critical to have a goal. And what that is will be different for each person or family.

You might want to buy a used car. Someone else might be planning to go back to school. You could be paying off student loans. Someone else could be saving for a down payment on a house. At the same time, there's the lifelong goal of preparing for retirement. Most of us have simultaneous short-term, medium-term, and long-term financial goals.

I remember a financial counselor telling about working with a woman who said she never could save any money. The counselor asked if that was always the case and the client said, no—she once really wanted a dining room table and had saved to buy it. But she didn't set a new goal once she reached the first one, and she stopped saving.

You need goals, and you need tools to help you meet your goals. Say you want to save some money so you can cover unexpected expenses instead of using credit—to start, you want $1,000 as a savings cushion.

We know that the earn-spend-save cycle, saving what's left over, typically means you have nothing left to save. So use two simple tools—direct deposit of your paycheck to your checking account, and transfers from checking to savings—to commit to and to automate your pattern.

Turn the corner

Start with a small amount from each paycheck. One you make this decision and automate it, your savings cushion will grow, even if progress is slow at first.

Don't let a self-destructive pattern become your default money cycle.

After a few months of success, look at your accomplishment and see if you can bump up your automatic transfer a bit more, even $10 a paycheck. This might seem like a small amount, but it's better than you were doing a few months ago. Keep at it—you will make progress.

You'll know you've turned the corner for good when your formerly self-destructive money cycle has turned into a productive cycle—and you have achieved your goal or goals or at least are well on your way. Don't get discouraged if you don't see straight-line progress; you're working against a longtime habit.

You're working to turn it around, so give yourself time. Be patient—and be persistent.

Financial Fitness Challenge

Your credit union personal finance professionals bring you this website and other tools to help you make the most of your money. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.

ST
Susan Tiffany, CCUFC
askem@cuna.coop

Financial Fitness Challenge links



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