7 Money Mistakes

There are more than enough mistakes to make with money but here are seven that can lead away from financial freedom.

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 and are in some states.  The fees and interest charges can easily add up to 400% interest.  There has to be a better option for you.  Contact your church or social services department to get a referral for assistance before you ever take a payday loan.
3. Live above your means – buying a house.  It is all too easy to buy a house these days with an adjustable rate mortgage or a tricky mortgage that might have interest only or a reduced initial rate.  The problem comes when the full payments are due.  The cost might even double.  If you couldn’t afford the mortgage initially, what makes it affordable just a few years down the road?  Look carefully at the next five years before you buy a house that might be too expensive.  Renting may be better than a future bankruptcy or foreclosure.
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 medical costs are a significant cause of personal bankruptcy in the United States.  It is so difficult to live life on the edge where one missing paycheck 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.  It will also help if you can carry health insurance of some kind.  Even catastrophic coverage (large deductibles such as $5,000 or more) can save you from financial ruin and the worry of getting adequate medical care.
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 you best to not add to the burden and to reduce those that you have.  See our list of ways to reduce costs for proven ways to save money.  See the important information for financial responsibility.
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 a 401(k) 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.

It’s all too easy to fall into financial traps.  They are all around us and advertising from loans, credit cards and nice things make it all so tempting to “just buy it now.”  The better approach is to take the Seven Steps to Financial Freedom. Read Save up to 36% Off Quicken 2007 Products + Free ShippingThe Real Secret to Money

Becoming totally debt-free E-book.