Some common financial pitfalls consumers should avoid include but are not limited to living in a debt spiral, not having a budget, missing due payments, not having a savings fund, and not being familiar with their credit score.
Building wealth is a lifelong journey. Along this journey, you learn the tips and tricks of money management and take on the financial habits you need to manage your income and expenses. Your path will also be full of financial pitfalls—those budgeting mistakes and snap decisions that raise your debt and lower your credit rating.
You can avoid some of the most common financial mistakes by learning how to spot their telltale signs. Whether you’re teetering on the edge of a pitfall—or stuck at the bottom of one—we’ve got the tips you need to rescue your finances and get back on track.
This article will cover what you can learn from your financial mistakes and how to build money managing skills you need to avoid them in the future. Let’s get to work!
The Debt Spiral
When you take a deep dive into your finances, you may discover the source of financial trouble for lots of Americans—a lifestyle that creates a debt spiral.According to CNBC, the average American owes about $90,470 in debt!1
Many of us take on student loan debt for school in early adult life. Soon after that, credit cards became quick solutions to money problems. Then comes car loans, mortgages, business loans, and sometimes more student loans. When some bills get paid, and others don’t, late fees and penalties pile debt on top of debt. Your installment payments are now doing more work covering fees than paying back your principal.
Before you know it, you are juggling multiple lines of credit, making payments whenever you can, and free falling down a debt spiral where you’re always paying on debt, but you never seem to get rid of it.
How Can I Get Out of the Debt Spiral?
To get out of debt, you have to stop creating debt. No matter what positive steps you take, any new bills will take resources away from tackling past and current expenses, even if you can afford them. When you’re low on cash, it’s easy to think that the solution to your problem is to make more money. However, getting a clear view of your finances helps you create a more effective strategy for making lasting changes.
Why Do I Spend More Than I Make?
“I don’t make enough money” is a story that’s as American as apple pie. We tend to quickly blame a lack of income for our lingering debt. But we also have some behavioral factors that may affect our approach to our finances.
Understanding Your Money Blueprint
Think of your money blueprint as your worldview on wealth. Your money blueprint is a set of principles and beliefs regarding how you value, spend, and save what you earn. Commonly, we base our money blueprint on our parents’ relationship with money and make the same financial mistakes. For example, if your grandma always said, “money is the root of all evil,” you may feel that your financial situation is a burden. If you’re struggling with credit card debt today, you might remember seeing your parents dodging collection calls at home.
Can you change your money blueprint? Definitely! But with any significant life change, reworking your money blueprint will be hard work. When you learn how to stop overspending, you can bring a better balance to your life.
Stop Living Without a Budget
Do you often find yourself in financial hot water? Then you need to change the way you organize your finances. The best way to plan your spending is with the help of a budget.
For anyone who doesn’t love crunching numbers (and that’s A LOT of us), a budget can sound like a complicated financial system. But you don’t need to get one of those green visors and an adding machine to be a good budgeter. All you have to do is remember that a budget is just a collection of lists. And when you use them in the right way, you can cover your needs and plan for your wants, all on a month-to-month basis.
Start building your budget by figuring out your total income. Use your pay stubs and other deposit records to add up what you make in a month. After that, write down your living expenses like rent, utilities, food, transportation, and your other monthly bills. If you are paying off a personal loan or credit card debt, include those as well. If you make more in a month than you owe, your budget has excellent potential. On the other hand, if your budget shows that you owe more than you make, you need to find out where you can reduce your expenses.
Sounds pretty simple, right? That’s because good budgeting just takes common sense thinking. But just because using a budget is simple, it doesn’t mean it’s easy. A budget is only reasonable if you use it. If you are new to financial planning, take time to review your budget every week. When you get in the habit of applying your money to your budget goals, your bills will stop overwhelming you.
Pay More Than the Minimum Due
Credit card debt and utilities sometimes offer the opportunity to pay less than the entire balance. A minimum payment is what a creditor will accept to keep your accounts current and avoid late fees. A minimum payment can provide immediate relief if your funds are tight for one or more months. However, this payment option provides the least impact on lowering your balance. A minimum payment covers the interest accrued during a billing cycle but not much beyond that. Paying more than the minimum amount due will get you eating away at your balance much quicker than sticking to the original loan schedule.
Paying more than the minimum due also helps to keep your credit utilization down. Credit utilization is how much of your available credit you are using. Repaying your debt as quickly keeps your credit available for other purchases. And the faster you’re out of debt, the faster your credit will improve.
Expect Emergencies
Your emergency funds are a reserve of cash that stays separate from your everyday money and left alone. In that way, this fund is like your savings account. But while your savings account is for expected expenses, your emergency savings covers life’s unexpected events. A good fund should have money to cover at least six months’ worth of expenses. While there are some pros and cons to having a savings account, the pros typically heavily outweigh the cons.
When you have a sudden car repair or medical issue not included in your budget, you want to avoid disrupting your personal finances. With a cash reserve, you can either pay off those surprise expenses or reduce your need for cash advance loans or other financial assistance. If you aren’t putting aside emergency cash, start today. Your future self (and their budget) will thank you for your hard work!
Pay Yourself: Make a Savings Plan
When considering all of your expenses, you must make a savings plan. Think of your life as a business. You’re the CEO, President, and all-around Top Banana that calls all the shots. Your company has just one employee—you. Your employee is one heck of a go-getter and does pretty much everything you ask them to do. How are you going to pay them?
Your savings give you a way to take care of yourself after retiring. A savings plan can take many shapes, but a solid plan should include savings goals that focus your efforts.
After determining your budget, plan to incorporate regular contributions to one or more savings accounts.
Don’t Leave Free Money Behind
Some employers will match contributions to a retirement fund, like a 401(k). If you leave your job for another one, remember to take your retirement account with you. If you don’t make a regular contribution with your paycheck, you can’t enjoy the fund’s annual growth benefits. If you need assistance exploring your retirement fund options, seek advice from a qualified financial advisor.
Borrowing Money From Your Savings
Your savings account has one primary function: to be left alone. The longer you can keep your emergency savings account untouched, the more interest your money earns. But if you are desperate for a loan, you should use your savings before creating another piece of debt. A good rule for taking money out of savings is keeping a firm limit on the number of withdrawals you can make per year. Most banks also have a limit for withdrawals within a month and charge steep penalties for going over the allowance.
Start Fixing Your Credit Score
Your credit score is a rating that provides a view of your creditworthiness at a glance. Your score is a part of your credit report—a comprehensive record of your financial behavior. Credit bureaus use an algorithm to calculate your credit score. Scores range from 300 to 850. The higher your score, the better your credit:
| Credit Score Range | Rating | General Implications |
| 300 – 579 | Poor | – May not qualify for credit or loans. – Higher interest rates if credit is approved. – Limited credit card options. |
| 580 – 669 | Fair | – Qualify for credit, but not at competitive rates. – Higher interest rates. – Limited access to premium credit cards. |
| 670 – 739 | Good | – Qualify for more loans and credit lines. – Reasonable interest rates. – Good credit card offers with benefits. |
| 740 – 799 | Very Good | – Qualify for most loans and credit cards. – Lower interest rates. – Attractive rewards and benefits on credit cards. |
| 800 – 850 | Excellent | – Qualify for most loans and credit cards at the best terms. – Lowest interest rates. – Access to premium credit cards with extensive rewards and benefits. |
People with poor to fair credit will have fewer financing options than people with good to excellent. That means it’s crucial to have your credit report accurate. The three major credit bureaus are Experian, TransUnion, and Equifax. Each bureau must provide access to your credit. Visit each bureau’s website and follow their prompts to retrieve your information. Review your report and look for erroneous information from someone else. Common mistakes include:
- Misspelled names
- Wrong address
- Account errors
If you find errors on your credit report, you can file a dispute with the credit bureau. Filing a dispute is free. Each credit bureau has a different process for handling disputes, but on average, a credit dispute takes 10-30 days to resolve.
Once you clean up errors on your report, your credit score still might need some attention. Your creditworthiness is the sum of your actions, so be the change you want to see! Make a consistent commitment to your financial security, and stay on top of paying down your debt.
Can I Avoid Common Financial Mistakes?
We’d love to tell you that financial mistakes will become a thing of your past after reading this article. The truth is, we may never be able to avoid falling into financial pitfalls from time to time. So take the time to learn the budget hacks that work best for you. The road to a solid financial future is long, but your journey towards a better financial future doesn’t always have to be bumpy.
Your financial recovery is always more important than whatever mistakes you make. Whether it’s extra income, a new side hustle, or a personal loan, putting together a plan will ease your financial hardship and relieve mental stress. Like all of life’s hazards, pitfalls are not to be feared. All you have to do is be ready for them.
FAQ: Avoiding the Most Common Financial Pitfalls
– Prioritize High-Interest Cards: Pay more than the minimum on cards with the highest interest rates.
– Balance Transfers: Consider transferring balances to a card with a lower interest rate.
– Limit New Purchases: Avoid using cards for new purchases while you’re paying off a balance.
– Set Up Alerts: Use your bank’s alert system to keep track of due dates and balance limits.
– Regular Review: Periodically review your credit card statements to understand your spending patterns and adjust your budget accordingly.
– Lower Fees: They typically have lower fees compared to traditional banks.
– Better Interest Rates: Credit unions often provide higher interest rates on savings accounts and lower rates on installment loans.
– Member-Focused: Being member-owned, they are more focused on customer service and member benefits.
– Community Involvement: Credit unions are often more involved in local communities, providing a more personalized banking experience.
To navigate enduring financial hardship without making money mistakes:
– Strict Budgeting: Create a strict budget focusing on essential expenses.
– Emergency Fund: If possible, use your emergency fund judiciously to cover critical expenses.
– Seek Financial Advice: Consult with financial advisors or credit counselors for guidance.
– Government Assistance: Explore government programs designed to assist those in financial hardship.
– Debt Management Plans: Consider working with a credit counseling agency to manage debts more effectively.
– Automatic Savings: Set up automatic transfers to a savings account to build reserves.
– Spending Alerts: Activate alerts for when you’re nearing your budget limit.
– Online Banking: Regularly monitor your account online to keep track of expenses.
– Overdraft Protection: Opt for overdraft protection to avoid fees and accidental overspending.
– Budgeting Tools: Many banks offer integrated budgeting tools to help track and manage your spending.
– Not Exploring All Services: Many credit unions offer a range of services; ensure you’re aware of all the benefits.
– Ignoring Credit Union Loan Opportunities: Often, credit unions provide more favorable loan terms than banks.
– Overlooking Educational Resources: Many credit unions offer financial education resources that can help you make informed decisions.
– Failing to Maintain Minimum Balances: Be aware of any minimum balance requirements to avoid fees.
– Not Comparing Rates: Always compare rates and services with other financial institutions to ensure you’re getting the best deal.
A Word From CreditNinja on Building Wealth and Avoiding Financial Pitfalls
CreditNinja encourages everyone to keep a budget and stay familiar with their current financial situation. Be mindful of how you spend your money, and seek help whenever you need it.
CreditNinja is dedicated to making sure consumers are equipped with all the information and knowledge they need to handle their finances wisely. That’s why we offer hundreds of free articles, debt calculators, and other financial tools in our dojo for free. Check it out to learn more today!
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