At one time or another, we’ve all made some financial goofs, whether it’s forgetting to pay a bill, bouncing a check, or overcharging a credit card. Once my wife paid a $58.00 bill with a cheque for $58,000.00. Fortunately, the recipient realized it was a mistake and returned the cheque! These types of mistakes are part of life, but too many of them can lead to serious money problems. Here are six financial pitfalls you should watch out for:
Failing to Budget
The old quote, “If you fail to plan, you plan to fail” rings true when it comes to budgeting. A budget is a weekly, monthly, or yearly plan for your spending and a must for tracking and controlling your money. If you are trying to save money or get out of debt, a budget can help you reach your goals. Failing to budget often results in overspending.
Your budget needs to be based on reality, so if you don’t have a budget now, you will need to keep track of where you are spending your money and what your average income is before you can set up your budget. It usually takes about 3 months of tracking spending before you get a clear picture.
The next step is to set some goals for your family. This helps you to decide as a family what your priorities are, and it will make it easier to decide which spending is essential and which can be changed.
After you have that, you can develop a budget that makes sure you are spending your money on the things that are a priority for you and your family.
Making Only Minimum Payments
Have you ever wondered why your credit card balance never seems to budge, even though you make payments each month? If you carry a balance on your credit cards, minimum payments are your worst enemy. Minimum payments are designed to keep you in debt as long as possible, with most of the payment going towards interest and little going towards principle. In fact, if you carry a purchase as debt on your credit card for any significant length of time, you may have paid twice for the same item because of the accumulated interest.
Maxing Out Your Credit Cards
Multiple credit cards at their limit can be bad news for your finances. Your credit utilization, or how much available credit you have, makes up a third of your overall credit score. When your credit is maxed out, it lowers your score significantly. It also indicates to lenders that you have a spending problem or you rely too heavily on credit, neither of which is good.
The other problem with credit cards is the interest rates charged. It is far more expensive to carry debt on a credit card than to use a line of credit or a loan from a bank or credit union. If you have multiple credit cards, it is a good idea to eliminate all but a couple of them — the ones charging the lowest interest rate — and consolidate the debt from the others into some kind of low-interest loan with your bank. Then you need to begin paying down the balances on the remaining cards and that loan.
Not Having a Savings Account
If your car broke down tomorrow and needed a $1,500 repair, would you be able to cover it? A savings account or emergency fund is a must for unexpected situations. Having just a month or two worth of expenses set aside can help get you through a job loss or emergency without having to go deep into debt. You would be surprised how quickly you can build up a decent emergency fund.
The key is to be consistent. It helps to have your bank transfer a set amount each pay period into a saving account. If you transferred $50 each pay period over a year, you would have $1200 by the end of the year. It takes a bit of self-discipline to dedicate that money just towards emergencies (instead of that new couch you really want), but you will be very thankful you’ve done so when a real emergency comes up.
Never Checking Your Credit Report
As many as one-third of all Canadians have found errors on their credit reports. These errors can lower your credit score significantly and end up costing you. Not only will you have to pay much higher interest rates, but you could be denied credit altogether. Credit reporting errors can take months to fix, so it’s important to check your report regularly.
Waiting Too Long to Seek Help
If you’re experiencing financial difficulty, it’s important to seek professional help as soon as possible. Waiting too long can limit your options. A free consultation with a Licensed Insolvency Trustee can help you find out the best way to get your finances under control, whether it’s simply learning how to manage money through credit counseling, identifying solutions that you can accomplish on your own, filing a Consumer Proposal to pay off debt, or by filing a Bankruptcy to get an immediate fresh start.
Life happens. Financial pitfalls happen to everyone at some point in their life and they can wreak havoc on your overall financial well-being. While it would be best to avoid these problems, they can still happen no matter how careful or disciplined you are with your money. Consulting with a Licensed Insolvency Trustee can help you take control of your finances and recover from the unexpected problems that come up.
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Leigh C. Taylor, LIT
