Everyone makes mistakes when it comes to their personal finances, there’s no avoiding that harsh reality. But if you know you’re going to make a misstep sometime, then the object becomes making less expensive mistakes and avoiding the costly ones. Big money goofs are the kind that set you back for decades.
The sad part is the biggest mistakes can happen quickly. Literally in a matter of days, you can handicap yourself for years, sometimes for debts that aren’t even in your name. Here are five of the great traps in personal finance.
Spending Thirty Percent of Your Income on Your House Payment
You might be thinking that your real estate agent told you that people typically spend between thirty and forty percent of their income on a house payment. That’s because most people over-buy when it comes to housing and your agent has a financial incentive, in the form of commission, to get you to spend the maximum amount you can. In almost every real estate market there are bargain properties that are below the comparable price per square foot for their neighborhoods, but don’t expect your agent to show them to you; you’ll have to find them yourself.
Making Minimum Payments on Credit Cards
Of all the foolish money mistakes people make, this is the most obvious. The average American has four credit cards with an average interest rate of fifteen percent, with some rates as high as twenty-two percent. Those who carry a balance have an average balance of around $7,000. If you paid that balance off in a year, you’d end up paying roughly $81 a month in interest—for a whopping $971.73 in a year. That’s nuts.
Cosigning a Loan
This is the great financial crippler of well-meaning parents, grandparents and spouses of the financially shipwrecked. Cosigning a loan is the greatest single financial mistake people make in their lives. Just don’t do it, regardless of the motivation. For every one person who gets lucky and sees the note paid off, there are a hundred who end up getting stuck with the balance, which also impacts their credit score. We know you love them, but irresponsibility and/or lack of financial understanding is how they got in trouble in the first place. It’s not your responsibility to make up that deficit, and statistics show you will bitterly regret it if you try.
Not Having An Emergency Fund
The number of Americans lacking any kind of an emergency fund is nearly one in three. An unexpected car repair or medical bill would put them in debt. Not having at least $1,000 in an emergency fund is crazy and $3,000 is better.
Not Tracking Your Expenses
Ignorance may be bliss but, when it comes to personal finance, it’s a disaster. If you don’t have a budget, if you’re not monitoring your expenses, you’re flying blind and, eventually, you’ll fly your financial life into the side of a mountain. Without being current on a daily basis about your finances, you’ll be subject to impulse buying with only the vaguest notion of where you are financially. Spreadsheets and financial tracking apps are freely available on the internet so there’s no excuse for willful ignorance.
Avoid these simple, but big financial killers and you’ll be amazed how much more empowered you feel when it comes to your personal finances.