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If you knew then what you know now
Ever wish you had a time machine to go back and undo past money mistakes — especially the ones that came with a hefty price tag?
There are a lot of financial habits that can lead you into debt. Some lure you there with the promise of being “smart financial moves.” Other habits are obviously bad, but you feel like you have few alternatives.
Want to avoid the pitfalls and keep more of that hard-earned cash? Here are 10 bad money habits that can lead you into debt disaster.
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Putting bills on automatic
Savings on autopilot, yes. Bills on autopilot, no.
While you’ll never forget to pay if you set up automatic bill pay, you can forget to keep enough money in your account and get hit with overdraft fees or penalties for returned payments.
Paying bills automatically takes you out of the process, says CFP professional Ed Gjertsen, former chair of the Denver-based Financial Planning Association. And that means you’re not noticing charges that don’t belong. Worst of all, “it further desensitizes you to spending,” he says.
Auto bill pay is especially dangerous with bills that are due sporadically, says Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling.
When unexpected money comes out of an account automatically, “it could be the tipping point, especially if somebody is living on the edge,” he says.
McClary suggests setting up alerts reminding you to pay the bills instead of setting up automatic payments.
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Having no emergency fund
From car repairs to a job loss, surprise expenses are a given. Having the money to cover them isn’t. An emergency fund provides a crucial crutch when things go wrong.
You should save three months of living expenses if you’re a two-income family, and six months if you’re a one-income family, says Andy Byron, financial adviser and partner with HC Financial Advisors in Lafayette, California.
Can’t swing that much? Even having a few hundred dollars in savings can give you a cushion to pay for repairs or groceries without having to reach for credit cards.
“Even if you can only afford to set aside a minimum amount, that … can really come in handy in an emergency,” says Michelle Dosher, managing editor for the consumer education department of the Credit Union National Association, or CUNA, in Madison, Wisconsin.
And often, it is smaller things, like home and car repairs — rather than job loss — that send people over the financial edge, she says.
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Failing to budget
If you don’t have a budget, it makes it harder to stave off financial disasters. A budget helps you decrease or prevent debt; it also helps you build savings in case of emergency.
A budget can protect you, but it also “gives you a road map to reach your financial goals,” Dosher says.
In order to build a successful budget, first spend some time tracking your spending. “Understanding how much money you have coming in as well as going out is the first step to truly keeping a successful spending plan,” she says.
You can improve your budgeting process — and stick to your plan — if you shop with a list.
“Even folks who have a pretty good grip on their spending habits” can get derailed when they don’t prepare shopping lists, McClary says.
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Spending more than you earn
Living beyond your means leads to nothing but trouble.
Symptoms include charging necessities, carrying balances, and — as the condition progresses — transferring balances. This is often followed by running up balances on those credit cards again.
If you have to reach for plastic to make it through the month, that’s a huge red flag.
“If you continue, you’re going to find yourself declaring bankruptcy” or borrowing more money, Byron says.
One solution: Put down the card and back away slowly. Instead, carry cash or a debit card linked to an account without overdraft protection.
It’s “so easy to be a bad consumer of credit card debt,” Byron says. When you carry “plastic in your wallet, it doesn’t even feel like money.”
Treat credit cards as a payment method, not found money. If you’re low on funds, put the cards away.
Then look for ways to increase your income or cut those expenses, says Linda Sherry, director of national priorities for Consumer Action, a San Francisco-based consumer advocacy group.
Choices like a prepaid phone plan or using a streaming service instead of cable can save more than you realize, she says.
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Co-signing a loan
In a word: Don’t.
What the person you’re co-signing for won’t tell you: This debt is yours now. All of it. Until it’s paid.
Missed or late payments can be added to your credit report, which lowers your credit score. And when your score drops, your creditors can start increasing interest rates — after proper notice — and cutting credit lines.
Even if your friend or family member is responsible and makes every payment on time, the loan balance or card limit is included in your existing obligations when you apply for a loan. If your debt load is deemed too high, you’ll be offered higher interest rates or denied credit, Dosher says.
When the loan is secured by an asset (like a car), if the asset is repossessed and doesn’t cover the loan value, “the lender can come to you for the outstanding balance,” she says.
If you’ve co-signed for a credit card, you may have to close the card (and see that the balance is paid) before your obligation is complete.
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It’s a classic chicken-or-egg scenario.
If you have no money troubles but pay your bills late, your credit score will drop. That means current creditors can raise your rates or cut your credit lines, and future creditors can offer higher rates or deny you.
So even if financial problems didn’t cause your late payments, those late payments could trigger financial problems, especially when late-payment fees kick in.
If you’re having trouble stretching your money to make the bills, that’s not good either.
It’s a “really bad habit being careless about paying bills on time,” says Dosher.
If you pay electronically, find out how long the system you’re using takes to process payments, she says. Electronic doesn’t mean instantaneous.
If you’ve never been late, some creditors will grant you a one-time pass. So find out what the creditor’s policies are.
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Ignoring your credit report
Other people will be viewing your credit report, whether you do or not.
Stop. Go get yours for free now at myBankrate.
Credit reports (and the scores that result from them) are commonly used to qualify you for credit cards and loans. And they’re increasingly being used for non-credit situations, such as screenings for insurance policies, bank accounts and jobs.
Because credit histories play such a big part in your financial life, it pays to see what is on it and whether it’s accurate, says Dosher.
A few things to check:
- Is the information about your account correct (balances, limits, name and address)?
- Are there accounts listed that aren’t yours or that you didn’t open? If so, that could be an indication of identity theft, says Dosher.
- Are mistakes, such as late payments, charge-offs, collections, bankruptcies or foreclosures, removed on time (often after seven years)?
- Are you running up balances? Even if you pay off bills monthly, it’s smart to keep your balances under 30 percent of your maximum credit.
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Using home equity as an ATM
It seems like smart financial planning: A home equity line of credit, or HELOC, operates like the ultimate credit account, letting you buy what you need at a low interest rate — and you can even deduct the interest, says CFP professional Jill Gianola, author of “The Young Couple’s Guide to Growing Rich Together.”
But the road to debt disaster is paved with these seemingly “smart” moves, especially the ones that allow you to buy now and pay later.
Miss a payment with a credit card, and you risk a bad mark on your credit. Miss a payment on your HELOC, and “you’re putting your house at risk,” Gianola says.
And although rates are low now, they’re variable, so they’ll likely increase over the life of your loan, she says.
A less obvious problem: With a HELOC, you pay only interest for the first 10 years. During the next 10, you have to pay off the balance, which means those payments could double or triple, she says.
Worried about your HELOC? Consider doubling the payments to pay it off, says Gianola.
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Not being adequately insured
If something happened and you had to replace your possessions, from the car you drive to the clothes you wear, could you do it?
What if the possession in question were your house? Because even if a disaster wiped out your home, chances are the balance on that mortgage would still be due. Could you cover it and afford a new place to live?
Nobody really knows how much insurance you “need.” It’s a fine balance. Too much and you’re draining your budget. Too little and you’re not protected.
You want to cover your main assets, including your health, so that a natural disaster or accident doesn’t also become a personal financial disaster, says Consumer Action’s Sherry.
That’s “where being adequately insured can really save your bacon,” she says.
Concentrate on three key areas: health, auto and property. Make sure your coverage is adequate to pay for catastrophic care in the case of accident or illness, and enough to rebuild your home and replace your car, she says.
And if you have significant assets, consider an umbrella policy that will give you liability protection across many areas of your life, including your home and auto, Sherry says.
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Not investing for retirement
It’s the ultimate procrastination: saving little to no money for retirement.
“Whether you open an individual retirement account or a 401(k) through the company you work for, anybody who is in the situation of not having started a retirement plan should start saving now,” Dosher says.
Especially for recent grads, “retirement seems so far away,” she says. “But it’s the magic of compounding interest that will help them over time.”
One mistake many people make when they plan for retirement? Assuming they’ll be spending less, says Byron. “Some people will spend more,” he says.
Not only does the cost of living go up, but retirees with increased time on their hands often want to indulge hobbies and travel, Byron says.
Here’s another way to earn extra for retirement without taking a second job: Take advantage of any matching fund your company offers, even if you contribute just enough to get the company match, says Dosher.
Getting that money early, when it has time to earn decades of interest, she says, “is huge.”