CommenTerry

Avoid the Three Biggest Financial Pitfalls

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.

The Great Billing Cycle Money Grab

I was starting to get worried. It was the eighth of February and my electric bill, that usually comes on the second or third day of each month, had not arrived yet. From reading some of my other posts, you know how paranoid I am of the U.S. Postal Service. So, I promptly got on the phone with my power company and asked if they had sent it out on time. The lady on the other end of the phone checked my account and said my billing cycle had been changed and that my bill would be printed tomorrow.

Now this meant that my February bill was going to be larger than usual because of the one-time longer billing period. The power company had figured out a way to get more money out of everyone for one month, even without a rate increase. I believe this is an unscrupulous practice. Now, they might argue that I'm getting some benefit out of it, in that I'm being allowed to wait later in the month to pay my bill. But that's no benefit to me. I always pay my bills when I first receive them and the money is still coming out of my February budget. In addition, since there is no corresponding shorter billing period, there will not be month when my bill will be smaller than usual.

This is not first time I've had the screws put to me by billing cycle changes. Many years ago, my cable company got 13 payments out of me in one year by constantly moving up the billing cycle, and thus the due date. Then last year, they did it to me again. Before I moved last May 16, I had already paid my cable bill, which was always due by 15th. After I moved, they changed the billing cycle on me and I received a bill that was due on the first of June. That's right, although the second one was reduced somewhat, I had to pay two cable bills out of my May budget. Once again, they were hitting me up for 13 payments in one year. When I called to complain about the injustice of such billing practices, the person I talked to couldn't understand why I felt cheated!

Now, the only effect this stuff has on me is to reduce the amount of discretionary money I have at the end of month to spend or put in my mutual funds and money market accounts. However, what about people who live paycheck to paycheck and struggle to make ends meet? These unethical billing cycle changes will inevitably cause some of them to have to not pay in full or forgo some much needed food and/or medicine. That's a crying shame!

The Perils of Living above One’s Means

I recently read a story on CNN's website about a woman who had a job making a $70,000 a year, got laid off in February, and was having to go to the food bank in March. But where was her savings? She didn’t have any because, like many other Americans, she was living way above her means and therefore was unable put anything away for a rainy day. Like many others, she just assumed she would always have a job and never planned for the possibility of not having one. While she was working, she made the mistake of thinking that things would always be as they were and the skies in her world would always be blue. No consideration was ever given to the prospect of a coming storm.

Why in the world did she go out and get a $2500 a month mortgage on a $70,000 a year salary? That was almost half of her gross monthly income and likely more than half of her monthly take-home pay. Do the math. Why did her bank or mortgage company even approve such a loan?  No doubt she was probably having trouble making that payment even while she was working. I'm sorry, but she helped bring this situation on herself. She gets little sympathy from me.

People are so covetous for expensive houses, cars, and other things these days that they don't bother to think. (There's more than one reason why covetousness is one of the seven deadly sins). I make more than $70,000 a year, yet I have limited myself to a mortgage payment of less than $700 a month. Therefore, I have no trouble making that payment and have plenty of money left to put in the bank each month. That's called living below one's means and more people ought to have enough common sense to do it. In fact, I have been able to save so much that, if I were to be laid off, I could live comfortably off my savings for more than 5 years and would have no trouble making my mortgage payment during that time. Some people, though, seem to always have to learn things the hard way.

Places That Should Be Avoided by People with Good Credit

People with good credit should never buy a car, furniture, appliances, or any other big-ticket items from places that offer credit to all. Most of the people who frequent these places are those who can’t purchase anything on credit anywhere else and cannot afford to pay cash. One thing I’ve noticed about these places is that their prices tend to be higher than those charged by retailers who are more discriminating in their offers of credit. That’s because they have built their anticipated losses (from those who are likely to default on their loans) into the sales prices. Therefore, when those of us with good credit purchase things from those places, we are, in effect, helping to pay for the items purchased by deadbeats. When we get near one of those places, we should keep driving.

Don't Get Added to the "Sucker" List

When and if you ever purchase any get-rich-quick scheme, your name will be automatically added to a "sucker" mailing list and your mailbox will start getting bombarded with other get-rich-quick schemes. A similar situation occurs when you enter any kind of sweepstakes. Your mailbox will begin to be filled with sweepstakes you didn't know existed. You will also soon discover that the original one you entered occurs a lot more often than you thought.

An Answer for People with Bad Credit

During one of recent presidential debates, moderator Anderson Cooper of CNN asked the candidates the following question: “What would you do to help people with bad credit buy homes?” That’s a silly question. It’s like asking, “What would you do to help bad parents have more children?” Of course, those weak-kneed politicians failed to call him on it and attempted to answer the question as if it were legitimate.

In reality, people with bad credit have no business owning homes. The effort by mortgage companies to give them home loans is what got us into this sub-prime crisis in the first place. I have the perfect housing answer for people with bad credit and I can sum it up in one word: Rent.

Listen to Sales Pitches Very Carefully

It is very important to listen to what people actually say instead of what they want you to hear. This is especially true when watching commercials on TV or listening to them on the radio. For example, in a commercial for a pain reliever, someone might say, "no pain reliever is better than ours." What its producers want to you to hear is, "our pain reliever works the best", even though that is not what could be legally stated.

Use Reverse Logic for Warranties

Normally, I tend to buy from those who seem the most enthusiastic about selling me things. However, when it comes to deciding whether to buy extended warranties, I'll use just the opposite logic. You see, an extended warranty is basically a bet. If someone is very enthusiastic about selling me one, that person is apparently betting that their product is of such quality that I won't ever need to use the extended warranty. Therefore, I'll take the same side of the bet by not buying the extended warranty. On the other hand, when people act as if they don't want to sell me extended warranties, I'll buy them!

A Service Not Rendered

It's no wonder the postal service encourages people to collect and save stamps. When someone buys a stamp and does not use it to mail anything, they have, in effect, paid for a service that will never be rendered. The postal office is paid for a service it will never have to perform. Like they say, that's great work if you can get it!

Why Be a Cheapskate to Yourself?

I've often wondered why some people are willing to work so hard to save a little bit of money. Here's one example: There are people who will work 100 hours a year, keeping records of various expenditures, in order to save $500 a year in taxes. Think about it - 100 hours to save $500 - they are paying themselves $5 an hour. That's less than the minimum wage! Now if were to offer them $5 an hour to do some work for me, they would be insulted and would probably ask me if I was crazy. Yet they would be willing to pay themselves such a minuscule wage.  Go figure!