There are money traps people often fall for. Are you victim of one of these?
Hindsight is 20/20. When I look back at the way I handled my money in my 20s, I want to smack myself. I was so clueless.
During that time of my life I built up a lot of debt. In fact, it lead me to declare bankruptcy. Money almost ruined my life. Almost.
When I really think about my money attitude in my 20s vs. my 30s and now my 40s, they are so different. My 20s were about spending, my 30s recovering and my 40s enjoying it. As I look back, I noticed that I actually made mistakes and fell into some pretty common money traps.
In fact, many of you might have fallen victim to one of these as well, and you might not even realize it. But now, you are going to know them all! I am going to share the most common money traps out there so that you are aware and can shut them down before it happens.
This was the downfall for me. I did not want to wait. If I wanted to buy something, I was going to do it. It did not matter if it was something as simple as dinner out or a new pair of shoes. If I felt I wanted it, I would just spend the money on it without a second thought. Big mistake.
So often, we decide that we want to get things because they work in the moment and solve a problem instantly. For example, look at dinner out. If you don’t feel like cooking, you just go out to dinner. The convenience of someone else cooking is definitely a money trap.
To learn your own money traps, you need to create a spending plan. A spending plan helps you identify where you spend every penny of your money.
Once you learn where you spend money, you can better determine where you are overspending and learn to scale back.
Read more: How to Create a Spending Plan
YOU DON’T HAVE (OR IGNORE) YOUR BUDGET
There is this myth that if you have a budget, you don’t get to spend your money as you would like. Please, don’t fall for it.
The reality is that your budget is your money road map. You get to plan your route every single payday. That means, you can determine the exits and detours you will take. If you want to go out to dinner this week, that is not a problem — just include it in your budget.
However, a budget is never “one and done.” Not at all. Your budget needs to be evaluated each and every month.
The reason to look at your budget is that you may have had changes. Perhaps the cost of food went up or you received a raise. Those affect how your budget works.
Once a month, set aside time to go back through your budget and make sure it still works. Update the bills and your income as needed. Make sure you still account for every single penny. If you are making more, now is the time to increase your debt payments or your savings account.
Read More: How to Create a Budget That Works
YOU FALL FOR SALES GIMMICKS
This is an easy trap for many. You see something is on sale and feel you have to get it. After all, it is a discount so you are saving money, right? Not so fast.
When you purchase something simply because it is on sale, you are often spending money you would not otherwise. Before you buy, make sure that you ask yourself if it is something you know you will need in the next 3 – 4 weeks. If not, then it might be best to pass.
Make sure you also avoid the store sales tactics such as: two for one offers, purchase limits and quantity discounts. These are ways that the stores lure you in to spend more money.
THE WORD FREE PULLS YOU IN
Free is one of those words many have a hard time ignoring. It makes you feel as if you are getting something special. However, free does not always mean free.
For example, stores often offer free financing offers. These are tempting because you can either make no payments on your new furniture for six months or can get your new television set interest free for 12 months.
The truth is, for most, that “free” period will cost them more than they realize. Let’s look at both scenarios.
If you purchase something and there are no payments for any period of time, that sounds great. You can make the purchase and don’t have to worry about how you will fit it into your budget. But, what you don’t realize is that you are still accruing interest on that outstanding balance.
Let’s say your loan is $500 and the interest rate is 18%. The store offers no payments for a year. Each month, you will add at least $7 to your outstanding balance. Your $500 item will now cost you $584. Doesn’t really make it a good deal now, does it?
The same is true with zero percent financing. Even though you are paying no interest, your interest still accumulates, but is just not charged to you. So, if you have a zero interest rate for 24 months, you better make sure you pay it in full before the end of the term. Otherwise, they will go back to the original balance and calculate your interest based upon the outstanding, accrued balance. This can make the loan cost you even more!
Before you make any large purchase, make sure you can really afford it. A deal is only a deal if it doesn’t cost you more than the price of the item.
YOU DON’T KNOW WHEN TO WALK AWAY
There are times when you just need to realize it is time to give up. If you have a vehicle that is costing you money in repairs every month or two, it might be more cost effective to get rid of it and put those repair costs towards the purchase of something newer (and more reliable).
It might also be the right time to upgrade (or even downsize) your home. If you have added two more kids to the family and are now living on top of one another, is it worth trying to find ways to add more space? Or, are you paying to rent a storage unit because you can’t fit everything in your home? It might be better to move, or even sell those items you can’t use.
You might even be trying to keep up with your friends and family. As much fun as it is to take vacations, go shopping every weekend and have the latest in electronic gadgets, it may not be feasible with your budget. Your envy and jealousy can be forcing you to go further into debt and struggle financially.
Learning to make changes to your lifestyle is not easy. However, it is a change you have to make to get out from spending more than you should.
NOT TRACKING EVERY PURCHASE (even the small ones)
When I ask people why they don’t use cash, they say it is because they spend it too easily. As soon as they get it, they spend it. The reason it doesn’t work is because they are not tracking their spending. They don’t actually see where the money goes, so they spend without thinking much about it.
Look at the $1 – $5 purchases you make. Those do not seem like much in the moment. After all, it is “just” $3. Right? Well, what if you make 7 $3 purchases a week? That is $21. Not just $21, but $21 you can’t really account for.
When you start keeping track of every penny you spend, you force yourself to be more accountable to yourself. You become much more aware of where you spend and how you spend it. Then, you begin to think twice before that second latte this week.
Read More: How to Create and Use a Cash Budget
Money traps don’t have to trip you up while working to achieve your financial goals. Recognize them and do what you can to avoid falling for them.