These mistakes are commonly made, and, almost every delivery of junk mail, ad on television or magazine offers an enticement to take one of these paths.
Some money experts may even offer these as the way to getting out of trouble. The problem is that each of these approaches can lead to even more money problems so they are best avoided.
1- Carry credit card debt. Credit card debt is extremely expensive and interest costs can add significantly to the original amount. If you can’t afford to pay off your credit card balances every month, there is a problem with how much income you have and the money you are spending. You need to increase income and reduce expenses to leave a balance to pay off the credit card debt.
2- Borrow from a payday lender. Payday loans are so expensive they should be criminal. The fees and interest charges can easily add up to 400% interest. There has to be a better option for you. Contact a financial advisor before you ever take out a payday loan.
3- Live above your means – buying a house. It is all too easy to buy a house these days with interest rates being so low. The problem comes because most people don’t allow any ‘wiggle room’. They want the biggest house they can get because they feel they deserve it. If you can’t afford a mortgage payment that is up to 40% higher, than what will happen if rates rise and you find yourself renewing at a much higher rate. Look carefully at the next five years before you buy a house that might be too expensive. Buy a smaller house or consider renting for a while.
4- Borrow to buy your way out of debt. It would be nice if a consolidation loan or second mortgage could fix everything but they rarely meet the borrower’s expectations. You may make some savings on interest payments and stretch the payments over time to help with cash flow but, in the long run, you will probably end up paying more interest overall. The best fix is to repair your income and spending imbalance in the first place. Make more and spend less is the formula that works.
5- Fail to save an emergency fund. Unanticipated costs are a significant cause of personal bankruptcy. It is so difficult to live life on the edge where one missing paycheque pushes you into financial crisis. Saving an emergency fund of 2 to 6 months income will not only give you coverage in case something happens it will also give you peace of mind. That peace of mind is worth a lot. Peace of mind will reduce tension and stress and make life much more pleasant.
6- Let your fixed living costs increase. Adding obligations to the monthly bills make it harder and harder to make ends meet. Basic obligations include rent or mortgage, utilities, transportation, insurance, food, child care, child support and minimum loan payments. Do your best to not add to the burden and to reduce those that you have.
7- Use your retirement fund to pay off debt. This is similar in principle to the idea of a consolidation loan only it costs more now and in the future. Penalties on withdrawing from RSP can easily cost 25% to 50% of a withdrawal. And you are losing the future earning power of that money if it were left in the account drawing interest. This approach is a heavy mortgage on your future that you will probably regret. The only guarantee is that you will have less money when you retire – if you can.
If you can avoid these seven mistakes, you are well on your way to a successful financial future.