They say that money can't buy happiness. While that may be true, money does remain directly linked to our everyday life. The amount of cash we have on hand affects our emotions, self-worth and self-esteem. As a budget counselor, I am in a unique position. It's my job to help people recognize the ways that they are sabotaging themselves with money and help them get back on track. What's interesting about what I do is the simple fact that most folks I work with don't even realize they are on the verge of financial catastrophe. However, seemingly harmless acts can pave the path to financial disaster.
I grew up watching my parents take on a financial juggling act. Instead of paying for services in full each month, my parents would make smaller, more frequent payments; enough to keep their heads above water, but not enough to pay the bill off.
Most utility companies, credit card companies and other institutions charge a late fee when payments aren't made in full in a timely manner. I sat down with one of my clients (who is an infamous juggler) and did the math. On all of her accounts, she was throwing away over $984 a year ($82 a month) in late fees; money she could have been saving, investing and applying elsewhere to help dig her out of her financial rut.
Spending Money Before You Have it In Your Account
I am a proponent of having a plan for your money. However, another huge mistake I have seen clients make is counting on a windfall, a large payment or just live on a prayer for future stability. They will then use this school of thought to justify taking on more debt or making irresponsible financial decisions.
Example: I have a client who will habitually "steal" from her light or water bill so that she can buy cigarettes. Then, if a paycheck is late or less than what she expected and when she can't pay her bills, she becomes the quintessential juggler I mentioned earlier. Yet, according to her, "it's never her fault. She just doesn't make enough money."
Shuffling Credit Cards
In my line of work, I hear a countless number of little white lies. Out of all the lies I hear, the most common is, "I don't have any debt, except for my house." All the same, upon further examination, I find that clients are not only in debt up to their eyeballs with their houses, but that they have racked up stacks of credit card debt on top of it.
To make matters worse, these clients will charge up the balance on one card to pay off another. However, instead of making headway and paying these cards off, they only continue making minimum payments and shuffling balances.
I sat down with one client who did this month to month and we found that over the last 4 years, she had racked up $11,000 worth of debt, paid $8,800 worth of interest, $1,200 in late fees and had nothing to show for it.
Living On Overdraft
Overdraft fees are expensive. My bank charges $34 for any NSF item presented to my account. When I have clients who are paying regular overdraft fees, I know that they are either on the verge of declaring bankruptcy, or that they aren't managing their money well enough. For these clients, I recommend using budgeting tools like Mint.com, checking their bank balance every day and keeping a good, old fashioned pen and paper register.
The last overdraft client I took on had paid a whopping $900 in the last year in NSF charges; obviously money she could have been using to save or pay off her debt.
Not Having Savings
If you're unable to set aside a small amount of money for savings in your budget, your finances are on shaky ground. Savings needs to be as much a part of your monthly budget as your light bill or grocery bill might be. When I'm dealing with clients who have little to no savings, I often find that they are up to their eyeballs in debt and taking out payday advance loans, loans against their car or even using their home equity as a piggy bank. The problem here is that all of these methods cost money, and a lot of it.
I force my clients to cut down on their expenses and make savings a budgeted line item. Then, I check on their progress every few weeks until they start building a nest egg, or emergency fund. The problem with these five pitfalls is that they are clear indicators that financial disaster (collections, late payments, bankruptcy, foreclosure and repossession) are looming right around the corner. The sooner you break these bad financial habits and exchange them for good ones, will be the sooner you can begin building wealth and breaking the cycle.
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