Wise money management is a skill that many people struggle to acquire. The combination of poor budgeting and careless spending can lead to deep financial trouble down the road. Consider the following mistakes and work hard to avoid them. Their consequences could have lasting effects.
- Making minimum credit card payments. The average American household carries roughly $16,000 in credit card debt, a sum that many pay off in small, minimum payments. While the credit card companies allow customers to pay off debt in this way, it isn’t for the sake of convenience. Consumer credit interest rates can top 20%, adding thousands of dollars to the principal balance over time. The less you pay, the more they earn. Ask yourself if those original charges are worth the outrageous markup and start paying more than the monthly minimum.
- Living from paycheck to paycheck. Whether you live extravagantly or struggle to make ends meet, the practice of living on the edge of debt is never a good one. Emptying your bank account without regard for savings is short-sighted at best. What will you do in an emergency? How are your long-term goals (e.g., retirement) affected by short-term fixes? Attempt to see the bigger picture and create a budget that sees it too.
- Becoming house poor. The U.S. housing crisis saw over four million foreclosures between 2007 and early 2012. Among the many contributing factors was the concept of becoming house poor. Buying a home is a large responsibility full of hidden costs. Signing on for an expensive mortgage also means signing on for insurance fees, property taxes, repairs, etc. Allotting more than 25% of your income to home costs can leave you vulnerable in times of financial trouble. Skip the spacious colonial and stick to a property you can afford.
- Under-insuring. Insurance coverage is an unavoidable part of life. While you may be content to use under-insuring as a cost-cutting tool, rolling the dice with liability could land you deep in debt. Your home, vehicle, and even life insurance require accurate reporting to serve their intended purposes. If a tornado destroys your house, will a small payout help you rebuild? If you are in a traffic accident, will liability-only insurance help you get back on the road? Monthly premiums may be steep, but scrimping on your coverage could carry expensive consequences. Play it safe in this arena.
- Living risk-free. Caution in some areas does not necessarily translate in others. Consider the following example
Troy is a 29-year-old chef. Over the years, he has managed to save $32,000 for retirement. Troy is unfamiliar and nervous about investment options, leading him to place his funds in an ordinary savings account.
Troy’s commitment to retirement savings is admirable, but his approach needs a little guidance. Long-term growth is imperative to establishing a well-funded retirement account. Allowing your funds to sit stagnantly means missing out on potential opportunities. Speak with a financial advisor about how to handle your savings. A professional can help you set up a plan that addresses your goals and your risk tolerance.
This guest post was provided by Sarah Elliot, a writer in the credit repair industry.
Image credit to millionaire mindset secrets