By Liz Pulliam Weston of msn.com. (She wrote
this article in last year.)
7 financial disastrous mistakes that people make:
1)
Carrying large credit card debt Carrying credit card balances is not the norm in America. More than half of U.S. households have no credit card debt, and only 7.2% carried balances of $10,000 or more.
However, the average credit card interest rate is about 13% - 14%; carrying any credit card debt is a big,
red flag that you're living beyond your means. Paying off that debt should be a priority.
2)
Letting fixed-living costs swellIf you've cut your spending to the bone and are still struggling, maybe you need to take a closer look at the bones -- that is, your basic living expenses.
Elizabeth Warren, a Harvard University bankruptcy expert and co-author of the personal finance book, "All Your Worth" , recommends that people's "must have" expenses total no more than 50% of their after-tax income. (Your after-tax income is basically your take-home pay, with any tax deductions like 401(k) contributions and health insurance premiums added back in.)
"Must haves" typically include:
Mortgage or rent
Utilities (including basic phone service)
Transportation (gas, car payment, car insurance)
Other insurance (life, health, property, disability)
Groceries
Child care
Minimum loan payments
Child support or other court-mandated payments
Recently, subprime mortgage becomes a main factor in the swelling of fixed-living cost.
Once you've trimmed the easier stuff, like utilities and groceries, you come to more agonizing decisions, such as finding cheaper child care, opting for less expensive housing or taking in a roommate. Alternatively you can look for ways to boost your income.
3)
Using retirement savings to pay off debtTo raid IRAs or 401(k)s in order to pay off debt is
Incredibly expensive.
Penalties and taxes typically eat up 25% to 50% of such withdrawals, but even worse is the loss of future tax-deferred gains that money could have earned. You should figure each $1,000 you withdraw from a retirement account now will cost you at least $10,000 in lost retirement income. That assumes 8% average annual returns over 30 years, which is a reasonable long-term assumption for a balanced portfolio of stocks and bonds.
Often shortsighted.
Grabbing money from your retirement doesn't help you fix the problem that caused the debt in the first place, which is usually overspending.
Furthermore, money in retirement accounts can be protected if you end up filing for bankruptcy.
4)
Using payday lendersThese lenders promise you a short-term loan, to be paid off when you get your next paycheck. But they charge you fees that are the equivalent of a 400% annual interest rate, or even more. Many people find when payday rolls around that they're not able to repay the loan, so they wind up rolling it over and incurring more fees.
5)
Failing to have an emergency fundAmong the unemployed, the average time between jobs is around 17 weeks. Yet only about three in 10 U.S. households have liquid savings sufficient to last them even 12 weeks. Many either live paycheck to paycheck or have less than $1,000 in liquid savings.
Having a sufficient emergency fund can help you withstand all kinds of financial setbacks, from car trouble to losing your job.
Even if you're concentrating on other goals, like saving for retirement and paying down debt, you should keep at least $1,000 for emergency.
Keeping space open on your credit cards or home equity line of credit can be a temporary supplement to a real emergency fund, but as soon as you can you should give yourself a real cash cushion.
6)
Using subprime mortgage to finance your houseThe Center for Responsible Lending, a nonpartisan research group based in North Carolina, predicts that more than 18 percent of the people holding those subprimes loans will go into foreclosure in the next three to four years.
7)
Trying to borrow your way out of debtSo many debtors are looking for a magic bullet in the form of a consolidation loan and think their problem is that they just haven't found the right one.
If you don't have home equity to tap, the debt consolidation loans available to you typically come with sky-high interest rates and hefty fees. Instead of getting you out of debt faster, they normally stretch out your loan term so that you wind up in debt much longer and pay a lot more in interest. Clearly, that's not the way to go.
Even if you do have lots of home equity, using it to pay off credit card debt is because, once again, you haven't fixed the problem that caused the overspending in the first place.
Often, the best option is to simply buckle down and pay off the cards, one by one. If you have good credit, you may be able to negotiate lower rates directly with your lenders. If not, and you're having trouble making progress on your debt, you might consider a debt management plan through a legitimate credit counselor.
If you're really drowning, and facing debts you can never repay, then bankruptcy might be the best of bad options. Filing bankruptcy is often unpleasant and expensive, but unlike real suicide, the damage isn't permanent.
Better yet, let's hope you can contain the damage to your finances before your situation gets that bad. Realizing how serious these seven missteps are can be the first step toward averting disaster, and getting yourself on the right financial path.
