Maybe it’s due to lack of knowledge, economic inflation, or keeping up with the Jones’, but people today struggle with finances more than ever. Debt continues to trouble and effect most families. Due to numerous factors, it’s so important to keep your mistakes to a minimum. Staying away from these mistakes could be the key to survival during any hard financial times.
Excessive Spending
Overspending and frivolous spending add up over time. You may be able to rationalize it here and there, but it really is the little things that make the difference over time. That drop in at your local fast-food restaurant or your daily specialty coffee can steal lots of savings from you. The problem is that they come in such small increments that it seems like no big deal. What’s $5 here and there? It could amount to a lot.
If you spend $25/week on going out to eat, that amounts to $1,300 per year and that amount seems a lot scarier to view, doesn’t it? That money could go to paying down debt, your emergency fund, or even to set aside for that vacation you’ve always wanted to take. If you’re struggling in your financial life, avoiding these small mistakes will be more important than ever.
Revolving Debt
Revolving debt is debt that you pay every month and doesn’t have an end date. No specific term. Some examples of this include credit cards, your Netflix account, subscriptions, cell phone, and cable. When you’re tight on money, you need to evaluate these “auto” items to determine whether they’re a need or want. You need to create a leaner lifestyle when your money is tight.
Relying on Borrowed Money
Using credit cards has become commonplace when you’re talking about buying essentials. But many are paying double digit interest rates on items such as gas, food, and other disposable items that are long gone before the bill even arrives. Definitely before the bill is paid in full. Because of this, it’s not wise to use credit for these items unless you’re able to pay it off every month. The interest rates that you pay increase the true price of the item to an amount that you’d probably not pay if it was listed as such. And for some of you, you’re charging more on your cards than you’re making. Big trouble there.
Buying a New Car
Ideally, we’d all have the goal to pay for a car in cash, but most buyers are not able to do this. You may have to evaluate the cost of the vehicle if you can’t afford to pay for the car in cash. Keep in mind that just because you can afford the payment, doesn’t mean that you can afford the car. A car is a depreciable asset (decreases in value over time), so you’re borrowing money on an asset that is losing value every day you own it, but still paying the full price. Remember layaway. A car loan is essentially layaway. Even worse, people want to trade up every two or three years keeping your finances stretched, losing money on each trade-in.
I am aware that there are times when someone has no choice but to take out a loan for a car. The thing to consider is the vehicle that you’re choosing to get. Do you need that high end SUV when you could choose the simple sedan? An SUV also comes with higher gas costs and is more money to insure, costing you even more on top of the actual loan payment. Unless you have to have an SUV for a boat or trailer, I’d consider skipping it if you’re tight on debt.
In purchasing a vehicle, you should look for cars that have good gas mileage (less expense), costs less to insure, and is cheaper to maintain. Go to www.consumereports.com where you can find all of that information. If you don’t have a subscription, the library has them for free. Cars are one of the biggest expenses that people incur next to a home and buying one that is more than what you need, might end up burning through money that could be used to pay off debt.
Overspending on a Home
I know that with the predominance of HGTV and other such shows, most people want to purchase an amazing home. Bigger is not always better. With it could come more expensive taxes, maintenance, and utilities. Just like a vehicle. Just because you can qualify for a home, doesn’t mean that you should buy it. The maximum that you should consider borrowing is 25% of your gross annual income, but you don’t have to go that high.
Using your Home Equity loan (HELOC) Like a Piggy Bank
If you have an equity line on your home for improvements, you may be tempted to use it for other things. Since an equity loan uses your home as collateral, you are literally putting your house on the line, and risking losing it with missed payments.
Living Paycheck to Paycheck
If you’re living paycheck to paycheck or direct deposit to direct deposit, you’re not alone. Many households live that way and can be disastrous if an emergency occurs. In 2019, according to Investopedia, the US household personal savings rate was 7.3% and luckily rose to 12.4% as of May 2021. With continued overspending, it puts you in a very precarious position. You’re using every dime just to keep you afloat. One missed paycheck could set yourself on a downward spiraling path. You don’t want to be overextended when a recession hits. The pandemic did this to many. An emergency fund of 3-6 months of expenses is a buffer that could keep you from losing your home. For more information on emergency funds, review Emergency or Review Funds, June 16, 2021. https://realpamelaferguson.wixsite.com/website/post/emergency-or-reserve-funds
Not Investing
If you’d like to be able to have your money working for you, instead of you working for your money, you need to be investing. Making monthly contributions is essential to build your future savings. There are many kinds of investments. The stock market and real estate are two good ways for long-term growth. Start investing as soon as possible. Even small amounts can help in the long run. The sooner you start, the more that it will grow. If your employee offers a matching program then, at a minimum, you should be putting in that amount. If not, you’re losing out on free money.
Using Savings to Pay Off Debt
Paying off debt can get tricky and you may be tempted to get it over with by using money from savings to do that. The problem with doing that could cause you more financial losses in the long run. And thinking of taking out retirement funds is an absolutely no-no. You then have to deal with paying it back and hefty fees. Instead of draining savings, work on creating more income to pay it down. Selling unwanted items, cutting back on costs, and even picking up a second job or side hustle would be better options.
Failing to Plan
Where you are a year from now is a reflection of the choices you choose to make right now. YOU are the one that decides what your future will look like. Are you spending your time watching TV, scrolling through social media, doing any of the other things sucking time from your life? By setting aside two hours a week to plan and direct your finances, you are setting up your future instead of wasting it away. Make this evaluation time a priority for your schedule.
Bottom Line
The bottom line is that you have to be smart and avoid common mistakes that set you up to chase your tail for years to come. Start small and progress as you get the ball rolling. Don’t give up and keep going. Always keep your eye on the prize and consistently focus on getting there. Putting up sticky notes with your goals on them will help you stay motivated. Stick one on your bathroom mirror and another on your console in your car where you’re confronted with them on a daily basis. You can do this!
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