6 big financial traps to avoid
October 2, 2009 · Tagged with Banking and Budgeting
4. Avoiding Debt Altogether
Advantages: “Debt free”. It sounds good, doesn’t it? And it can be. Living debt-free is a wonderful goal and is more achievable than you might think.
Downside: However, debt can also be a tool. If, in your quest to remain debt free, you are turning down “good debt”, that is, debt that allows you to leverage your investments, you are doing yourself a disservice. Examples of good debt include taking out a mortgage to buy a house. This is because houses and property tend to appreciate over time, and owning your home can lower your living expenses compared to renting. Another example would be taking out a student loan for post-secondary education. While student debt can be a huge responsibility, it is also an investment in yourself that boosts your potential earning power.
5. Cutting Your Variable Spending
Advantages: If you are looking to cut your spending, this suggests that you have a budget to modify. That’s great! Often variable expenses (expenses that are not fixed, such as entertainment, dining out and personal spending) are out of line with the amount we earn. An honest appraisal of where your money is going is a great step to getting your budget in fighting shape.
Downside: This seemingly great idea is only great if you include the second part of it: sticking to your new budget. Unrealistic expectations, or treating your budget goals as “guidelines” rather than rules, could leave you spending more than ever. (For more tips, see Get Emotional Spending Under Control.)
6. Paying Off a Major Loan in One Payment
Advantages: You’ve been working hard and saving – smart! Before your loans start accumulating interest, or even if they have, you decide to pay them off in one payment. That’s a wonderful accomplishment that will save you months’, or years’ worth of interest.
Downside: If you choose this route, make sure you take a look at your interest rate. Some loans have such a low interest rate that you’d be better off putting your money in a savings account that earns you a higher return and paying off your debt monthly. Keep in mind this is only a good idea if 1) your savings interest rate is higher than your debt interest rate and 2) you are disciplined enough to pay the debt off on time, every month, and not to spend your hard-earned cash on luxuries instead. The bonus? Responsibly paying off monthly debt helps you to establish a good credit history. This is especially helpful if you don’t have a credit history (or you are trying to rebuild a bad one).
There’s nothing worse than making a choice you thought was conscientious only to find out it had hidden consequences. Make sure you do your homework and your financial situation will be the best it can be.