Welcome to another post! Some of you may have noticed that I have been posting what may be described as “rants” on social media. I try to poke some light-hearted fun at what would otherwise be fairly serious topics. I posted this week about the “new normal” when it comes to spending habits.
Habits are what makes and breaks us. This rings true across many subjects. Health, career, and relationships are all areas where habits dictate outcomes. This is especially true in the realm of finances. Change your habits, change your life. Here are some habits keeping Americans broke.
Frivolous/Excessive Spending
Fortunes are squandered one dollar at a time. It may not seem like much when you order that Starbucks grande two-pump vanilla soy latte (I’ve got a whole post dedicated to this), dine out, or order a pay-per-view movie, but every little thing adds up.
Spending just $25 per week on dining out costs you $1,300 per year, which can be applied toward an extra credit card payment, auto payment, or a combination of extra payments. If you’re in financial trouble, avoiding this behavior is critical—after all, if you’re just a paycheck away from foreclosure or bankruptcy, every dollar counts!
Continuous Payments
Subscriptions! We’ve all got a few of them silently eating away at our bank accounts and/or credit cards (which, ultimately, get paid through our bank accounts). I ask you to consider whether you truly require all these products/services that require you to pay every month, year after year.
Cable television, video streaming, music services, and high-end gym memberships can all drive you to pay indefinitely while leaving you with nothing tangible to show for it. When money is tight or you simply want to save more, adopting a leaner lifestyle can help you fatten your savings and protect yourself from financial difficulty.
Financing an Elevated Lifestyle
Using credit cards for purchases and paying the balances off before they incur interest is a solid move. You build up rewards and cash back on purchases that would have otherwise been made with cash/debit.
Paying double-digit interest rates on fuel, food, and a variety of other products that are gone long before the bill is paid in full, this is the opposite of solid. If you can’t pay cash for something, you should not be paying credit for it.
Credit card interest rates on balances carried from month-to-month effectively multiply the total cost of whatever you’re buying. Spending on credit and making only minimum payments means spending more than you make.
Purchasing New Cars
Millions of new cars are sold each year, but can all these new car owners actually afford them. Being able to make the monthly payments doesn’t necessarily mean that you can afford the car.
Borrowing money to buy an automobile results in the consumer paying interest on a depreciating asset, exacerbating the gap between the car’s value and the price paid for it. Worse, many people trade in their cars every two or three years, losing money each time.
I recognize that there are times where it may make sense to finance the purchase of a car, but there’s no reason to get something you have absolutely no use for.
How many buyers require a large SUV, which is the most popular vehicle type right now. Such vehicles are costly to purchase, insure, and operate. Unless you tow on a regular basis, there may be better options for you.
If you must purchase a car and/or borrow money to do so, consider purchasing one that suits your needs and helps you to maximize your money.
A pre-owned vehicle is a great option. Many still carry factory warranties and the best thing is the original owner took the hit of the initial depreciation.
Cars are expensive, and if you buy more than you need, you may be wasting money that could have been saved or used to pay down debt.
Overspending on Your Home
When it comes to purchasing a home, more is not always better. Unless you have a large family, a 6,000-square-foot house will simply result in higher taxes, maintenance, and utilities. Do you really need to make such a long-term dent in your monthly budget?
Using Home Equity for Unnecessary Purchases
Refinancing and taking cash out of your property requires careful consideration. In some circumstances, refinancing may be advantageous. Examples of this are major reductions in your interest rate or cashing out to pay off higher-interest debt. Funding a vacation with home equity does not fit this bill.
A good strategy for accessing your available equity is to open a home equity line of credit (HELOC). This effectively allows you to utilize the equity in your home like a credit line. Just be sure to apply the same usage and payment strategies that we touched on at the beginning of this post, otherwise this could lead to paying excessive interest to use your home equity line of credit.
Living From Paycheck to Paycheck
Many families live their lives from paycheck to paycheck, and an unforeseen emergency can quickly turn into a financial nightmare if you are unprepared.
Overspending puts people in a vulnerable position, where they need every penny they earn and an interruption in their income, even for just one pay cycle, would be disastrous. This is not the situation you want to be in when an economic downturn strikes. If this occurs, you will be left with few options.
Many financial advisors may advise you to retain at least three months’ worth of expenses in an account that is liquid. Loss of job or changes in the economy could deplete your funds and leave you living on credit, with debt paying for debt. A three-month buffer might mean the difference between keeping your home or losing it.
Not Investing for Retirement
Time is your greatest asset when it comes to investing in your own retirement. It can also be your greatest foe. You may never be able to fund the retirement you deserve if you don’t make it a point to start now.
If you do not get your money to work for you now in the markets or through other income-producing investments, you lose valuable opportunities afforded to you by time. Contributing to designated retirement products on a monthly basis is vital for a comfortable retirement.
Utilize tax-advantaged retirement accounts and/or your employer-sponsored plan. Understand how long your assets will take to grow and how much risk you are willing to take. If feasible, consult a knowledgeable financial advisor to match this with your goals.
Borrowing From Retirement Accounts
You may believe that if your debt is charging 19% and your retirement account is paying 7%, switching the retirement for the debt will result in you pocketing the difference. It’s not as cut and dry as that.
In addition to losing the potential of compounding interest, it is extremely difficult to repay those retirement savings, and you may be charged exorbitant fees and penalties. If done properly, borrowing from your retirement account can be a reasonable option, but even the most astute planners struggle to put money aside to rebuild these funds.
When a debt is paid off, the desire to repay it usually fades. It will be very tempting to keep spending at the same rate, which means you may get back into debt. If you want to pay off debt with savings, you need to realize that you still owe a debt, and that is to your retirement fund.
Failing to Plan
Your financial future is determined by what is happening right now. People spend countless hours watching television or reading through their social media accounts, but setting aside two hours every week for their finances is unthinkable. You must know where you’re heading. Prioritize spending time planning your budget.
A Parting Word from Jerome…
To steer clear of the dangers of overspending, start by getting a hold of the small expenses that add up rapidly, then move on to mastering the major ones. Consider your options carefully before adding additional debts to your budget, and bear in mind that just because you’re able to make a monthly payment does not mean you can actually afford the financing. Last, but not least, make saving a portion of your earnings a monthly goal, as well as spending time building a solid financial strategy.