The Three Buckets To Move You Out Of The Debt Cycle

Hi There, Friends of Freedom:

As is my custom, I was sitting with my morning beverage today

looking through the investment and investor news

getting a handle on what the media might be talking about

that would spook my clients and de-rail them from the plans

we have put together to ensure that:

1. The family is properly protected in the event that they would “die too soon”

2. They are moving out of the “debt cycle” in order to get into the “cash cycle”, and

3. They are on the road to financial freedom, and will never have to worry about “living too long”

I suddenly remembered that in a previous post, where I spoke about ‘the Cash Cycle versus the Debt Cycle’,  I promised to cover how to structure your accounts in a highly efficient and effective way.

Let me fulfill that promise…

The Three Accounts To Move You Out Of The Debt Cycle

Step 1 on the road to the cash cycle is to set-up three fundamental accounts.

Remember that it is critical to be in the “Pay yourself first” habit and these accounts serve the purpose of keeping you in that habit. Let’s go through the accounts in more detail.

#1 The Emergency Account

The first account is the Emergency Account. Thr emergency account is usually built up to three months of income. Now, you are not going to build up your ‘bucket’ of up to three months of income overnight – but these small baby steps start bringing you towards that point.  What you are going to use this account for are emergencies, vacations, or any purchase you expect to make within zero to two years.

Let me give you an example of this.

We had a client of ours call us and say “you know, we don’t want to throw off our plan, we don’t want to get back into debt, what do we do?”

So we said – let’s take a look at your account, and in her emergency account she had five thousand dollars. So we asked “what’s the emergency?”

The situation was that they needed three thousand dollars right now for their van, because the transmission went out and they did not want to use their credit card again and go back into the debt cycle.

Everybody can relate to that, right?

Well, we advised, let’s pull it out of your emergency account.

The client was OK with that but asked the obvious follow-up question…

“How much do I pay back?”

Well here’s the beauty of the strategy we had set up with them – you don’t.

They were on a budgeted automatic $250 a month program, so in the next few months the account  was going to build back back up.

That’s how you pay yourself first!

That broke the debt cycle!

That’s what the emergency account is used for.

#2 The Short-Term Account

The Emergency account is backed up with a short-term account.

This is built up over time to contain up to six months of income.

This is for unforeseen events, like loss of a job or disability. Also it is for short-term events such as the purchase of a vehicle or the down payment on a home.

Now, for the majority of our clients, our goal when we sit down with them, is that they will  buy their cars cash. When they buy the cars cash it comes straight out of the short-term account. That is then built up over the next four or five years until its time to go buy another car.

That’s basically self-financing.

That’s when you are in control of the purchase.

When you have that money set aside – you are in front of the eight ball – not behind it.

#3 – The Wealth Building Account

Finally we back these up with the wealth-building account. The wealth building account is for retirement, for example IRAs – Traditional or Roth – monies that they are putting away for retirement.

So when we break it down this way – these become just the baby-steps in moving into the cash cycle. And that is, the psychologists say, the best way to success – replace the bad habit of the debt cycle with the good habit of the cash cycle.

All it takes is discipline, an awareness of, and a commitment to

The Three Accounts To Move You Out Of The Debt Cycle

And what considerations you should be aware of when funding these accounts, that, my friends, will have to be the subject of a future posting…

Stay Tuned!

Love Is Looking Together In The Same Direction

I AM Peter Pocklington.

P.S. The sad part of this article is that when I am out and about talking with families about their need for the comprehensive financial needs analysis – which we provide free of chargebecause we feel it is that important – I so often hear them say “Its already too late”. Just know that it is never too late. There are always things that can be done – the question is will you do them.

Click here to view our short video “That’s How Life Works” –> albuKB8sG0o

Published: August 14, 2012, 18:15 | No Comments on The Three Buckets To Move You Out Of The Debt Cycle
Category: Financial Education

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