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