Money Mistakes That Make You Poorer

When money’s tight, it’s easy to forget basics like budgeting, saving, and paying down debt.  Broke folks tend to stop thinking about the long term and get caught up in day-to-day worries.  The problem is, though, that losing sight of your long-term financial goals can have some serious consequences.  Behaviors like making minimum credit card payments, not budgeting, and relying on less-than-legit sources of cash (like payday loans) can seem like quick fixes.  But the truth is, all of these behaviors can lead to financial disaster in the future.

Low on cash?  Barely breaking even each month?  Avoid these common money mistakes:

1.  Using payday loans/cash advances.  As the name suggests, a “payday loan” is a very short-term loan designed to help you get from one payday to the next.  If you’re broke, a payday loan can seem like just the thing to get you out of a tight spot: You borrow two or three hundred bucks from one of these lenders, and you agree to pay the money back (plus a fee based on the amount you borrow).  But the problem is, folks who take out payday loans end up trapped in a never-ending cycle:  Many payday lenders offer the option of “extending” payday loans – for a fee, of course.  These fees stack on top of your original loan amount, creating a mountain of debt that’s increasingly difficult to pay off.

What to do instead:  Almost anything else – you don’t want to get caught up in a payday loan trap. Seriously, though:  If you have trouble making it from paycheck to paycheck, it’s high time you sit down and make a budget.  Include things like bills; rent or mortgage payments; entertainment; savings; and – most importantly – savings.  If you’ve got a few hundred bucks set aside in a savings account, you won’t need to rely on payday loans to get through a tough time. 

Don’t have a budget?  That brings me to the next big mistake . . .

2.  Not making a budget.  Budgeting isn’t exactly most people’s idea of a good time.  And when you’re broke, it can be even harder to make yourself sit down and write out a budget – after all, who wants to be reminded that money is a little tight?  But here’s the thing:  If you don’t have a ton of extra money, it’s incredibly important to make a budget so you know exactly how much you need to pay your bills, buy gas and groceries, and build your savings.  A thoughtful, well-planned budget can help you avoid last resorts like payday loans and credit cards.

What to do instead: This is an easy one.  If you don’t have a budget, make one.  Right now.  Need help getting started?  Check out this video or this post for some budgeting basics.

3. Using credit cards as an extra source of income.  If you read my blog regularly, you know that I’m not opposed to credit cards, as long as they are used responsibly. If you can pay your credit card off – in full – every month, you are using your credit card responsibly.  But if you reach for your credit card every time you run low on cash, you’re just setting yourself up for future debt woes. 

What to do instead:  Stop using your credit cards.  Pay cash – and if you can’t afford to pay cash, don’t buy it.  End of story.  To avoid temptation, try leaving your credit cards at home when you go out.  Work on paying down your existing credit card balance, if you have one.  If you’re having trouble getting from paycheck to paycheck, it might be time to revisit your budget and make some adjustments.

4.  Making minimum credit card payments.  When you’re low on cash, it’s easy to trick yourself into making minimum credit card payments.  It’s hard to let go of extra cash, especially if you don’t have much to begin with.  Why pay $50 or $100 extra when you can get away with paying a low minimum payment of $20 or $30?

The problem is, by only making your minimum payments, you are ensuring that you will be in debt for years.  You’re also ensuring that you’ll pay hundreds – or even thousands – in interest charges on that debt.  In other words, it’s a good way to make sure that you stay broke.

What to do instead:  Sit down with your credit card(s), and make a plan to start paying off your debt.  Decide how much extra you can pay every month in order to bring down your balance (you may have to cut non-essential budget areas like entertainment or miscellaneous).  Not sure how to start paying down your debt?  If you’ve got multiple credit cards, consider the snowball method.  For more debt-reduction tips, check out this post or this post.

5.  Ignoring your finances. If you’re struggling financially, the worst thing you can do is turn a blind eye to your money woes.  Sure, it can be a little depressing or stressful to think about money problems, but it’s even more stressful to ignore the problem until it gets worse.

What to do instead:  Take a proactive approach to your finances:  Make a budget, open your bills right away (and pay them on time!); save money, and check your bank account often.  Make a point to know exactly how much you owe on your credit cards, student loans, or other debts. Don’t feel pressured to keep up with friends’ spending.