Money management can be difficult to master. It’s often complex and time consuming, and doing it well is a skill that has to be studied and learned. When money’s tight, it can become even more challenging to manage personal or business finances. Here are some very common pitfalls that you should avoid at all costs. […]
Money management can be difficult to master. It’s often complex and time consuming, and doing it well is a skill that has to be studied and learned. When money’s tight, it can become even more challenging to manage personal or business finances.
Here are some very common pitfalls that you should avoid at all costs.
Working Without a Good Budget
The most common and basic advice for money management is that you should create and stick to a budget. Parents, teachers, and financial advisers all use it as the keystone of any advice about working with personal or business finances. It is, unfortunately, ignored all too often.
It’s easy to equate a budget to some kind of straight-jacket which allows no freedom, or room for fun. Nothing could be further from the truth. A well prepared personal budget includes allowances for things like entertainment, vacations and holidays, and discretionary spending. A good budget takes time to create, and should reflect not only your bills and expenses, but what you want to do as well. Here are some good tips on creating a budget.
Cash Advance from a Credit Card
Going to the ATM and getting a cash advance on a credit card is one of the easiest ways to borrow money. It’s quick, and tempting, especially when you’re out on the town and your funds are running low. Or when you’ve run in to an unexpected expense and you can’t pay using a credit card.
It’s also one of the absolute worst ways to borrow money.
Cash advances against a credit card are charged a much higher interest rate than purchases. And because of the ease with which they can be used, can tend to run your credit card debt up very quickly. There are other drawbacks, as discussed in this article.
You should consider taking a cash advance from your credit card as an absolute last resort. There are other options, such as seeking a short term loan by getting title loan relief. Many title loans offer a fast online application, and can be funded within 24 hours.
Borrowing More than You Need
Lenders exist to loan you as much money as they possibly can. The more money you borrow, the more you pay the lender in interest. So, lenders will often offer you more money than you really need to borrow. Many times, we simply accept the full amount of the offer and wind up with a loan that is going to cost more than we really wanted or needed. Many less than reputable short term lenders specialize in over-financing borrowers, counting on the borrower’s stress level and other emotional motivators.
Before you apply for any loan, you should carefully consider how much you actually need to borrow, and have a plan in place to be able to pay the loan off without breaking the bank. Be wary of any lender who tells you that they must lend you the maximum amount they can instead of the amount you’re asking for. Before you sign, be sure that you’ve checked the payment schedule to ensure the payments are within your budget, and that there are no surprises (such as balloon payments) in the loan agreement. Also, if the deal “feels” wrong, don’t be afraid to walk away; there are any number of lenders available to you, and if you qualify with one lender, you’re sure to qualify with others.
Science Fiction author Robert Heinlein coined the acronym TANSTAAFL (“There aint no such thing as a free lunch”) over 60 years ago, and it’s wisdom is as relevant now as it was then. EZ Credit is like a free lunch in that the loan might be easier to get than more conventional loans, but you’ll pay for that ease in interest rates and payment schedules that seem to stretch out forever.
One of the most common “EZ Credit” scams is “Rent-To-Own.” Say you want to purchase a new leather sofa for $1,200.00, but don’t have the cash on hand. A “Rent-To-Own” business will gladly offer you a seemingly low payment of $25.00 per week for 3 years. (The $25.00 payment is a well thought out number, as we tend to think of that as not a lot of money.) The application process is quick and easy, and they typically don’t run a credit report. They also promise that ontime payments will help your credit score.
A quick look at the arithmetic of the loan tells us that we’re going to pay 3 times as much for the sofa ($25.00 x 4 weeks = $100.00 per month; $100.00 per month times 36 months = $3,600.00.) Also, many, if not most, “Rent-To-Own” stores do not report payments to the credit agencies. Finally, once they start getting your money, the stream of offers from them for additional credit is nearly non-stop, and it’s easy to give in to the temptation of purchasing other high-value items from them.
Treating Credit like “Extra” or “Free” Money
Many times, we get a credit card, equity loan, or other financing to spend for any purpose we see fit. Credit cards and lines of credit, such as a home equity line) can give us the feeling of having “extra” cash. It’s simple enough to spend the money without really considering the actual cost of the money.
For example, you’ve taken a home equity line for the purpose of home improvements. You’ve made your shopping list, and gone to the store to purchase your materials, when you spot an expensive power tool you’ve always wanted, but could never really afford. It’s tempting to put that tool in the cart with the other things you’re purchasing. You would probably never have bought the tool if you were spending against your regular income.
Credit should be treated with the same care and thoughtfulness as regular income, if not even more carefully. It should be at the front of your mind that any purchase with credit will result in interest charges, meaning whatever you buy costs more.
Credit is a great tool, and very useful. Managed correctly, it can help you achieve your financial goals, and provide a safety net if you find yourself with a large expense you simply can’t pay with your normal income, such as emergency home repairs, or starting a home based business. You should always consider the all of your options before using credit, and think before you sign.