So, perusing my usual financial sites this morning, I came across this article titled “7 roads to financial ruin”. Now that’s a title! Upon reading the article, I found it to have some things that I am sure everyone already knows, but she went into great depth on each of the seven ways we ruin our finances. What were the seven deadly financial sins, you ask?
Here they are in the order she listed them, along with my thoughts on each:
Carrying credit card debt
– Carrying credit card debt means you are living above your means, unless of course you needed to use your credit cards for some emergency, like a hospital stay or the like. If you cannot pay off the balance at the end of each month, you need to stop using your credit cards now. As in today. Put them away, cut them up, put them in a block of ice. But stop using them. Think of them as that old “cigarette in a glass” emergency cigarette that smokers used to get as gag gifts.
Letting fixed-living costs swell
-We fell into that trap when we moved to our new place. It cost us $1000 more per month when we finally moved out of our small place into a bigger place so we had room to breathe. Somehow, we figured we would find the money…well, coming up with another $1000 every month is a big expense and we were not ready for it. Other people fall into it in the transportation category, buying a brand new Lexus when they bring home $26,000 per year. Ways to cut fixed expenses? Go to a cheaper grocery store (Trader Joe’s if you got it is best in my book), find a friend or relative for cheaper day care, call your utility companies for discounts and cheaper rates, consolidate loans into one bill so your payments are smaller. Do what you have to do to lessen the monthly damage to your pocketbook.
Using retirement savings to pay off debt
-Ouch. I would never recommend this one, unless you just CANNOT get out of debt using your monthly paychecks, you only need a smallish amount to pay off the debt, and you have a ROTH retirement vehicle. You can take your deposits out free of penalty and taxes, just not your gains. I would not touch your 401K or the like due to the penalties and taxes you would have to pay. I have read stories of people tapping retirement money to send a kid to college…the old saying is true, “You can borrow for education, but you can’t borrow for retirement”. Never do this. Ever.
Using payday lenders
-Another way people have scammed those in the lower income segment of the population..”Borrow today, pay us back when you get paid”. Um, no thanks. Paying fees and an interest rate of some 1,000,000% is not going to help your bottom line. If you must “borrow” money until payday, use your credit card or emergency money. Just be sure to replace it once the check comes in or you will lose it forever.
Failing to have an emergency fund
-While I strongly agree that one must have an emergency fund, I don’t think its appropriate for everyone to try to save up 6 months of living expenses if they are carrying any debt at all. As Dave Ramsey says, a $1000 emergency fund is all you should have if you have debt to pay off. So, get started with only $20 a month if you have to, get that emergency fund up to $1000, and then attack the debt like nothing else. That way, you have a little backup money if something should happen (flat tire, doctor visit) and you can pay off the debt quicker. Once the debt is gone, you should keep a 3-6 month emergency fund somewhere where it can be accessed quickly. We have a few thousand in our regular BOFA savings account, and the rest of the emergency money in a money market account at ING.
Hanging on to an unaffordable house
-Pretty self-explanatory. If you cannot afford where you live, move. Don’t try some creative financing, don’t borrow money to pay the rent/mortgage…get out. The quicker you do, the less deep the hole will be that is to be your house. Or rather, your house you no longer own.
Trying to borrow your way out of debt
-Here, the author talks about a few ways people borrow to get out of debt, through consolidation loans, home equity lines, even filing bankruptcy. I agree that you shouldn’t borrow to get out of debt, unless you can borrow from your parents or something and they understand your situation. Borrowing more money to pay off even more debt is not going to help your situation, it will only make things worse. Although she said consolidation loans are not a good idea, in some cases I think they might be a necessary evil as long as you GET RID OF EVERY CREDIT CARD and don’t take on any other debt. This is key. Once you consolidate, that’s it. No more borrowing for you until that loan is paid off.
Overall, I thought this article was great and it offered a wealth of information and tips to those that think they are over their head or headed in that direction. And if you want to see the rest of it and follow the links throughout to other financial advice, check it out at MSN Money.