Breaking The Cycle

It’s called “robbing Peter to pay Paul”. Jane finds herself strapped – she lost her job and her husband is forced to try and carry the weight of a double income family… minus her income. The two of them decide to apply for a payday loan to help with a few bills until she finds another job, but two weeks come and go and she’s still not found anything. So, they apply for another one. Then the car breaks down. They apply for another one.

By the time that loan repayment is due, they find that they’re so strapped they need another one, so they apply elsewhere for another loan to repay that one. And so it goes.

The easiest way to avoid the vicious cycle of payday loans is to never get one in the first place. Blunt, but true. Payday loans are intended for emergencies only, but many people find themselves relying upon them as a steady form of income.

The first step is an obvious one: reduce spending and establish a savings plan. This can be as simple as packing lunches for work/school, making coffee at home every morning and eating dinner at home rather than at a restaurant. Sit down with your household members and determine what your monthly bills are and how much income is required to pay them. A good rule of thumb is to figure bills high and income low, that way you don’t find yourself in a bind.

Many banks are now offering an interesting option with checking and savings accounts: they are rounding the amount of a check/debit card purchase up to the nearest dollar and dumping the change into a savings account automatically. This makes balancing a checkbook that much simpler and allows your savings account to grow little by little with no effort on the part of the consumer. (See your bank for details and availability.) If your bank does not offer this option, most banks offer many different types of interest bearing savings accounts and CDs.

A popular type of savings account is sometimes called a “Christmas Club” account. With this type of account, the account owner can make deposits as often as they like, but can only withdraw the money as the Winter holiday season draws near. But even if you don’t want to open another bank account, saving money can be as easy as putting all loose pocket/purse change in a jar at the end of every day.

When all is said and done, the only way to break the cycle is to just do it. Start small and don’t let little obstacles discourage you. Be smart about borrowing and saving and before you know it, you’ll be on the road to financial freedom.