For the average person and/or family, the three biggest financial pitfalls to avoid are new vehicles, credit card interest, and short-term loans. Any and all of these can drain a person's or family's coffers of much needed funds. At best, they create opportunity costs, i.e., money spent on them could be better spent on sound investments like a home or stocks (both of which appreciate in value over the long term) or on college or retirement savings. At worst, they can eventually create financial hardship and even lead to bankruptcy. Buying brand new cars, trucks, SUVs, etc. can be a real money-eater. They all depreciate in value, some much faster than others, of course. Most vehicles depreciate the most in their first year or two of life, so the person buying a vehicle when it is new will have to absorb the bulk of its depreciation costs. With the price of new vehicles as they are today, that amount can be quite excessive. On top of that, many people have the financially disastrous habit of trading them in about every two to three years for another new one. That habit will result in the piling on of depreciation and debt. Instead of buying new, I suggest buying a low-mileage vehicle that's about one to two years old. There are services available now like CarFax which allow you to trace a vehicle's history. If you look around, you can find previously-owned, former-rental, or former-lease vehicles of every type, make, and model which are in like-new shape and have less than 20,000 miles on them. You can even find them on Ebay now! Once you have found one, I suggest keeping it for least three years after paying off the loan. Ideally, I would suggest paying cash for it to avoid those used car interest rates and then keeping it for at least seven years, but I know paying cash is not an option for most people. If you absolutely feel the need to give yourself or a family member the gift of a new car some day, I wouldn't fault you for that. However, I suggest planning this out over several years, similar to how one would save for a college education for a child. Estimate the amount that you are saving by buying used cars instead of new ones and pay yourself that money by putting it in the bank on a regular basis. Over time that money will add up. Once you have saved enough, wait until a dealer that sells the kind of vehicle you want offers one of those deals in which you can get zero percent interest or a rebate. Pay cash for the vehicle and take the rebate. That way, you get the zero percent interest and the rebate! Credit card interest is another item that will erode a person's or family's financial assets very quickly. The interest rates you pay are about 534,457,469 percent! Just kidding, but it does seem that way sometimes. Seriously though, they often run as high as 18 to 21 percent. A $20 meal will end up costing $36 when paid for over a five year period at an 18 percent interest rate! Paying only the minimum payment can result in an endless cycle of debt that will eventually be practically impossible to escape, outside of bankruptcy. If you find yourself already in this situation, I suggest you see a professional credit counselor as soon as possible. If you are already paying more than the minimum payment, try to gradually increase this payment and suspend all new credit card charges, if possible, until you've paid off the balance. Obviously, the only sensible way to handle a credit card is to pay off all charges each month as they are accrued and not maintain a balance, thus avoiding all interest. A credit card is a nice convenience tool. However, if you don't have one and you feel that you could not pay off the charges each month, then you are far better off not having one. If have one or more cards and have run up balances that you have had to struggle to pay off, you would be better off getting rid of it/them. Short-term loans are also debts to be avoided like the plague. These include those "quick refunds" offered by many tax preparers, those "pay day" loans offered by predatory lenders popping up like cancers on seemingly every street corner, and many kinds of unsecured loans. The worst thing about short-term loans is their deceptiveness. Most people don't realize what kind of wild interest rates they are paying. For example, $10 in interest paid to keep $200 for one week results in an annualized interest rate of 260 percent! Allowing a tax preparer to deduct $100 from your $1500 refund so you can get it instantly instead of waiting six weeks for the I.R.S. to send it to you will result in an annualized interest rate of 58 percent! I bet someone advertising those kinds of interest rates would have difficulty finding any takers, yet people take on these kinds of loans all the time as long as the interest rates are disguised. People who are wise financially avoid most, if not all, of these biggest wastes of money. Most people who are financially independent right now got that way in whole or in part by avoiding wasteful spending. |
