Financial traps lurk around every corner. We fall into these traps when we become a little too smart in how we manage our money. Perhaps we think we can get a great deal with 0% financing.
We have a spending plan, but don’t really follow it each month (spending is under control). Or we buy in advance, borrow from our savings with the good intention of paying ourselves back.
While on the surface these moves seem harmless, dig a little deeper and you’ll see how they can rob your financial peace.
0% Financing Deals
I know 0% financing seems to make sense and on the surface seems like a great deal! After all, you’re not paying any interest unless you miss a payment. A lot of people use 0% financing for TV’s, appliances and cars. We’ve certainly used 0% financing for items in the past. However, this is never as good of a deal as what it seems. 0% financing is still debt no matter how you look at it. You’re locked into making payments every month until your pay off date and there are typically big penalties if you miss.
The biggest problem with this type of financing, or any financing really, is presuming you will always have the money to make the payments each month. The bigger the payment, the bigger the presumption you’re making. Surprise expenses come up from time to time for all of us and that’s just a fact of life. If money is tight, you might be forced to miss a payment or have to put that surprise expense on a credit card because of your 0% payment obligation. Forget about 0%, avoid the temptation, and simply consider whether or not you want the debt hanging over your head.
Not Following a Spending Plan
We create a budget to plan our spending each month and it would be ridiculous to pretend that we’ll always stay within our budget. As good of a planner as we may be, there are still going to be times we spend a little more than anticipated. Maybe because we bought more groceries than usual or gas prices increased. There are many reasons. But if we consistently ignore our spending plan and don’t correct overspending problems, we’ll dig ourselves into a hole that can be difficult to get out of. Too much eating out? It will eventually catch up. We’re either forced to take money from another budget category to keep our spending in balance, or use a credit card to make up the difference. Otherwise, we won’t have the money to meet other expenses. Don’t beat yourself up about overspending a little, but don’t let it run out of control either. Create a plan so that you have a plan for your money and your money isn’t spending you.
Borrowing from Savings
Borrowing from savings is easy to do sometimes. Perhaps you’ve been told you’re getting a work bonus, but you won’t receive the money for a couple of months. Anyone remember Clark Griswold presuming upon the future and purchasing his swimming pool in the move, Christmas Vacation.
It’s easy enough to spend ahead from savings and then some. But the problem is using money today you may very well need tomorrow. Again, life happens and we all need our savings from time to time, right?
Things get really complicated when you have to put new expenses on a credit card because you’re waiting on the future money to pay back your savings. Borrowing from savings gets more complicated when you borrow based on an assumption that you’ll earn the extra money later.
What happens if you don’t earn that money? Again, you’re forced to swipe a credit card to meet expenses!
Buying a House with Little Money Down
The home of your dreams is certainly enticing, especially when you’re out touring homes on a Sunday afternoon. The bottom line here is that we’ve learned that a house isn’t necessarily a safe investment. It’s subject to economic swings just like the stock market. So, not having at least 20% down for a house potentially costs you more than monthly PMI and a higher monthly mortgage payment. Should our economy go into a recession, you risk being upside down in your investment and either having to short sell or foreclose if you need to get out of it.
Play it safe and rent until you can save for a 20% down payment (even if you work with a company like Unison that can help with the downpayment). There is no shame in renting and having more flexibility, less maintenance overhead and perhaps a more desirable location. Long term, buying a house is a great move, but step into it with financial sense and control dream house emotions.
Not Having a Least $1000 in Savings
“Make sure you have saved at least 6 months to a year in your emergency savings account!” The advice goes something like that. Honestly, I appreciate this advice from many financial gurus, but I sort of snicker when I hear it. I agree with it, don’t get me wrong. Sure, save, save and save to cover your expenses in the event of a job loss or illness. Cover yourself for emergency situations. But truthfully, Americans have a hard time saving, especially, this much. If it’s within your means, please do so. Work hard to put away excess cash and find ways to save money. But, focus on one goal first: save $1000. I’ve met some emergency situations over the years and honestly, most of them are fundable with $1000 or less. I’m not suggesting that’s all you should have, but you’re going to meet an emergency here or there and $1000 is the minimum you need to have stashed to keep the financial peace.
All these things are certainly easy traps to fall into. Believe me when I say my wife and I’ve experienced every one of them and they’ve definitely robbed us of our financial peace, creating some stress and worry.
What do you think about these traps and what traps have you experienced?
Photo credit: Mike Bitzenhofer