“Although we can’t always see the future,
we can always plan for it.”
~ David Wood
Here are 7 common financial mistakes families make:
1. Excessive/Frivolous Spending
Fortunes large or small are often lost one dollar at a time. It may not seem like a big deal when you pick up that double-mocha cappuccino, grab a quick lunch, have dinner out, or order that pay-per-view, but little items add up. “Drops make up the ocean” goes the saying. Just $25 per week spent on dining out costs you $1,300 per year, which amounts to an extra mortgage payment or several car payments. If you're enduring financial hardship, minding each dollar really matters! So make a budget and stick to it!
2. Never-Ending Payments
Ask yourself if you really need items that create monthly payments for you, year after year, often with long-term contracts. Things like cable & satellite TV, subscription radio, home alarm service, credit protection watches, video games, cell phones, on-line entertainment services, etc., require regular payments but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way towards fattening your savings and cushioning your from financial hardship. Often it pays dividends to contact these providers and let them know they need to reduce their pricing or you will have to discontinue their service. Cell phone companies, for example, are very competitive and want to keep your business. They may very well put you into a lower cost plan rather than give up your business! Also, routinely check the services you are receiving to ensure you are getting what you pay for and want what you are getting. If you have cable or satellite TV, are you paying for a premium package with a bunch of channels you never watch? Change packages!
3. Living on Borrowed Money
Using credit cards to buy essentials has become normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn. If you have credit card debt and CANNOT pay off the balance in full each month, you are abusing your credit and need help! Get a free copy of your credit score from one of the major credit bureaus. They are required by law to give you your credit score once a year when you ask. Credit counseling services can sometimes be useful. Listening to a financial help guru like Dave Ramsey is a great idea. If credit card spending is out of control, get rid of the cards and start paying in cash! It is a lot harder to spend cash than use plastic.
4. Buying a New Car
Millions of new cars are sold each year even though few buyers can afford to pay for them in cash. The inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.
When you need a “new” car, do some research first. Organizations like Consumer Reports can provide you with a wealth of information for a modest fee. Check out the used car market to find something that meets your needs but does not carry the brand new car premium. If you need to borrow money be frugal. Many consumers do not realize that if they fail to make the payments on their car, not only can the car be repossessed, the lender can go after the unpaid debt, or the difference between what the consumer owed and what the lender was able to resell the car for! In other words, not only could you lose the car, you could have to pay for a car you no longer have! Remember, if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt.
5. Buying More House Than You Need
A house is nearly always the biggest purchase anyone will ever make so it should be done intelligently. We recommend no more than 1/3 of your monthly income go towards your home. This means if you earn $6000/month, only up to $2000 should be needed to pay the mortgage, home insurance, and housing-related costs (such as a property taxes and home owners’ association fees). Don’t forget to add up all of those items! It is also wise to not buy a home until you have saved up a down payment of at least 10% of the home’s cost and have a good credit score. Obviously, the more you put down the lower your monthly mortgage will be and the sooner your equity will grow. There is nothing wrong with renting until you have properly saved up for a house. Renting entails far fewer care and maintenance problems – which are typically the responsibility of the landlord, not you as the tenant.
Keep in mind that when it comes to buying a house, bigger is not better. A larger home equals higher payments, higher property taxes, higher utility bills, and more things to fix and maintain. We recommend doing an honest and careful “housing needs” evaluation. Determine how much of a house you truly need BEFORE house hunting. Set your limits in advance so when the time comes, you won’t be tempted to go bigger or fancier than is good for your budget.
6. Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Home equity loans, second mortgages, or collateralizing your home are equivalent to giving away ownership of your castle. Giving up home equity can quickly cost you thousands of dollars in interest and fees. It is virtually impossible to build equity by paying down your mortgage while borrowing from the equity at the same time. You could easily end up paying more for your home than it is worth. If you absolutely need to tap into your home’s equity, make sure you are doing it for a limited time only for a defined purpose. Then discipline yourself to pay it back timely and even early (check for any prepayment penalties BEFORE taking on the loan). Any equity loan should be factored in as part of your housing budget since that really is what it is.
7. Not Having a Will or Living Trust
Many people think wills and trust are only for the rich. Not so.
Having a will is one of the most important and loving things you can do for yourself and your family. Contemplating your demise is not pleasant but studies have shown that the mortality rate for humans is 100%! You’re not going to live forever and you can’t take it with you, so plan accordingly! If you don’t make a plan, state law decides how to divide up your assets upon your death.
Through a will you instruct your “executor” what to do with your property upon your death. The executor has authority to take your will through the probate court process and distribute your property to your beneficiaries according to your wishes. Through your will you may also name a guardian for your minor children.
If your will is accompanied by a living trust you can avoid the time and expense of probate court altogether and keep matters private. You can reduce estate and other taxes. You can set terms for who inherits your property and how and when they are to receive it. And if desired, you can also disinherit individuals who you do not want to inherit any of your estate.
The Bottom Line
Develop a plan and stick with it! Think carefully before taking on any debt. Resist instant gratification urges. Being able to make a payment isn't the same as being able to afford the purchase. Most importantly in budgeting, allocate an amount each month to savings. Start small at first, if you need to, but work up to saving 10-15% of your monthly earnings. And make sure you have a will and trust so everything is well-managed when you are gone. We can help you will all of these things conveniently and affodably. Your success is our success!
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