May Financial Fitness Challenge--Make a Trial Run Before Big Money Moves

by Susan Tiffany, CCUFC

Learning to ride a two-wheeler was a rough experience for me as a kid. My knees and forearms got messed up and I can remember picking gravel and sand out of at least one wound.

Soon, though, I mastered that pretty little red and white Schwinn and enjoyed the sense of competence that accompanied learning to use the brakes, instead of various body parts, to stop the bike.

Achieving mastery of your money is similar to learning to ride a bike, but without scabby knees. You can learn the hard way, that's for sure. Or you can test-drive before you incur any financial scars.

See how it fits

How close are you to retirement? What's it going to be like living on your retirement income, from whatever sources you'll be drawing money? You can wonder about it—or you can try it on for size.

Talk to the people in your human resources department and to a retirement counselor who can help you determine how much you'll be drawing each month. Now, live on that for the next six months at least.

Pay attention to these kinds of concerns:

• Is this an amount of money you can live on without feeling too restricted?
• Can you travel the way you planned to on this amount of money?
• Can you maintain your home—protecting your equity—within this retirement budget?
• What medical expenses are you finding you need to cover, and is the money you have adequate to do that?
• If you had a major unexpected expense, could you cover it?

Facing these issues while you can still make adjustments can make you more comfortable about walking away from a steady paycheck.

Open off-Broadway

Here's another scenario you can play out in the safety of a trial run: dropping to one income from two so you or your partner can be a stay-at-home parent.

Some families find that, with the reduction in child-care expense and other work-related costs, like commuting and business wardrobes, one parent can stay home. It's a big decision—you're forgoing an income and also shelving, at least for a time, your personal career goals. But the driving consideration usually is can you even afford it?

There's only one way to know and that's to give it a test. Continue working, but use as little of the second income as possible. You'll have to continue paying for child care, of course, so it probably won't be possible to completely make a go of it on just one income, but come as close as you can. Sock away the income you're not spending for the time being.

You'll want to answer the same questions the practicing retiree pays attention to. Add to those questions:

• Can you and your partner both meet your own retirement saving goals on one income?
• Can you put aside money for the kids' future educations?
• Does your family have to sacrifice too much recreation and vacation experience to live as frugally as one income will require?

You won't necessarily answer all these questions, but you'll have a much better handle on this and similar major financial decisions by practicing first.

Test-drive a loan

Say you want to buy a new car and you have the choice of when to make the purchase. You try on shoes, you try on clothing before you buy...and of course, you test-drive a car. It makes sense to also test-drive the payments.

Do enough research to figure out how much money you'll be committing to a monthly payment. Use your credit union's online tools to transfer that amount directly into your savings account for at least six months.

The first month, maybe even the second month, things likely are going to be just fine. You'll think, this is going to be a piece of cake—I can buy that car. But along about month three or four you might be facing a choice between making that phantom payment or taking a vacation. This is real life, and a real spending decision. And because you're only practicing, the choice is yours to make.

You can do the same thing when you think you're ready to take on a mortgage. Be sure to allow not only for all the mortgage expense—principal, interest, taxes, and property insurance—but the routine and inevitable maintenance and replacement expenses that come with owning a house. Use online financial tools, again, and transfer the amount that exceeds your rent payment into savings for several months. Then ask all the questions that appear for the first two scenarios to assess your readiness for this big step.

There's a bonus to this kind of practice run—you will have a larger down payment for a car or a house because you've been putting money away while you tested your ability to live with the expense.

For any of these scenarios, if the dry run exposes issues with your plans that's wonderful. The idea is not to deep-six your idea if it doesn't work out but to make adjustments based on what you learn so you can go ahead and be successful.

And the really nice part is that you're making these modifications before you've made a no-turning-back commitment to a reduced income or increased expense.

Financial Fitness Challenge

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

Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter every month. Remember to register for the Financial Fitness Challenge.

ST
Susan Tiffany, CCUFC
askem@cuna.coop

Published May 7, 2012

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