Five Bad Financial Decisions that will Hammer you with Debt

This is a special post from Jason at Frugal Habits.

Anyone who has experienced the pressure of excessive credit card debt or the stress of paying bills they can’t afford, usually can point back to a series of bad financial decisions that they wish they could take back and have a ‘mulligan’ on.

Many times it isn’t one decision that caused all the mess, but a series of decisions that when combined together, created the nightmare they now find themselves in… In this post I am going to identify the 5 most common bad financial decisions that anyone can make, but will subsequently hammer you with debt and trap you into ‘debtor’s prison.’

1. Buying a house that makes you ‘house poor’

I love the show “house hunters” and even enjoy looking at houses I have no intention of ever buying – so I understand the temptation to max out your budget when going ‘all in’ on a house.

In western culture the idea of being a homeowner is dangled ‘like a carrot’ for those who are not ready to purchase a home or can’t afford it. Many times lenders and realtors will push you to buy more, borrow more, and subsequently become trapped into being ‘house poor’ without realizing it. (both almost happened to me)

Being house poor doesn’t necessarily mean you will get into debt, but it does make it much more likely as you will be maxed out on your budget, and any new unforeseen expense could put you over the edge.

2. Buying or Leasing a car that blows your budget

My wife loves fancy cars… don’t get me wrong, I do too – but I can live without them in exchange for something else (like a new tri-bike). If you’re a car lover and really long for that ‘luxury model’ sedan or decked out truck – you’ll have to focus really hard on this one.

Buying that new car can really put you at risk of being hammered with debt. Most new cars now a days can easily cost $500 a month when financed. Which is the same as a 1 -2 vacations to Hawaii every year – so be mindful. I recommend buying used and only when you absolutely have to.

3. Vacationing on Credit Cards

Speaking of vacations, they are fantastic! They are good for the soul and provide that relaxing time away from the busyness of life… I for one enjoy living like a millionaire when I’m on vacation, so I especially have to be careful of this one.

Using credit cards to pay for vacations is not advised, but is a common method for people to enjoy that time away. Instead of using your credit card, create a travel fund and contribute to it throughout the year to pay for that great vacation. You’ll enjoy the vacation so much more, and not feel guilty afterwards.

4. Overdoing it on Toys and Electronics

Toys, Toys, Toys – we all love toys… Maybe its a new flat screen TV, wave runner, or Coach purse. These purchases are not a necessity and are essentially ‘fat’ in your financial budget. A little fat is ok from time to time if it is not putting you into debt, but beware of the consequences of these purchases. You certainly don’t want to use your credit card to buy any of them.

5. Not funding your Emergency Savings

Lastly, it is vital you create and contribute to an emergency savings. This is my safety net for those unforeseen expenses that we all experience in life… It may be that last minute flight you have to purchase, a fix to your car you weren’t expecting, or your old computer died and must be replaced – an emergency savings account will cover all of these and keep you out of credit card debt.

Yes, these events happen to us all, but in order to stay on your budget and not go into debt – you will need this emergency savings. For me, my emergency savings is the number one reason I can stay on a budget and not get into credit card debt.

So there you have it – what bad decisions are you aware of, or perhaps made yourself along the way and can now look back and share?

Jason Clayton is the founder of Frugal Habits – a personal finance blog about eliminating debt, saving your cash, and giving generously. When not enjoying time with his beautiful wife and two daughters – Jason enjoys the great outdoors, reading a new book, traveling the globe, triathlons, and a good cup of coffee.

Image by Vectorportal/flickr

Comments

  1. says

    So, so true. Tying up too much money in your house payment can decrease your ability to fund many other investments, and – in this economy – it can make your stress level skyrocket.

    • Jason Clayton says

      Great one SB – It hurt me in the past as well. Thought I was an expert day trader – the proof is in the pudding – and the pudding tastes horrible. (I’m no expert)

  2. Marie at FamilyMoneyValues says

    Making more good decisions than bad is key to success (financial or otherwise) in life. Taking vacation on home equity loans was a bad decision for many people recently!

    • says

      You are right on there. No argument from me. One of the wealthiest people I ever met still drives a 1980s Toyota Corolla because he says that living within his means takes the stress out of life. He is a millionaire. If that car is good enough for him, it is surely good enough for me.

  3. says

    Guilty of number 1 as charged! Bought my house too soon, thankfully my house was cheap cheap cheap but I severely underestimated the work and cost of the work to be done, put me in the poor house until I started getting my finances in order! Live and learn :)

    • Jason Clayton says

      I hear you Andrea – I did the same. Bought a house right before having my first child and my wife cutting back on work. Doing ok now, but took a career change to ‘right the ship’.

  4. says

    I read that people who really want luxury cars can still save money buying used luxury cars. They still give you heated leather seats (or whatever) but since they’re five years old, they don’t cost nearly as much.

    • says

      That is a big point. You can get a luxury car that is a few years old for a lot less than a new one. I always joke that my second million will go to a McLaren F1.

  5. says

    The house poor risk is one that unfortunately many people take. For some reason, people think it is almost a right we have as Americans to live in a “dream” home. That mentality is what gets people into debt. The better way to buy a home is to get one that is not a dream home, but rather buy one that is simply good enough. Maybe when we have sufficient wealth accumulated, we can move into a dream home where the “dream” is actually realistic :)

    • says

      What good is having an amazing house if that is all you have? I am a big fan of finding housing that is affordable so you can enjoy all aspects of your life more.