Author: Mary Ambrose, CPA/MBA
Average American consumers love to utilize their credit lines and borrow money from the future to sustain comfortable or even excessive life styles.
However, if you’re not careful, unruly financial practices outlined below could lead to turmoil in your life.
1. Credit Card Debt
I personally have lots of open credit cards, but I only use two or three and pay off entire balances every month. The only reason I use credit cards is to get cash rewards for expenses I have to incur anyways.
But if you cannot effectively control your impulse spending habit, then putting these plastics away is the best thing to do.
I know some friends who made the conscious decision to only use debit card for online purchases in order to curtail credit card usage. The downside to that is they occasionally run into data hacks and it’s evident that using debit card online is actually unsafe.
What we’re trying to avoid here is unbridled credit card spending that might lead to snowballing unpaid balances that you have to pay high interests for the rest of your life.
- You’re dying to get the latest iPhone, so you put it on your credit card;
- Macy’s and Bloomingdales are running sales for shoes and high-end handbags right now that you can’t resist;
- Some friends are heading to exotic vacation towns over Christmas. How can you be left behind? So you put the airfare, hotel, restaurants, etc. all on your credit cards;
They all add up and they might impact your credit score negatively. Read more on that in the related post “In-depth guide to improving your credit score“.
If you spend like this on a regular basis, you’ll end up paying compounded interests on these past expenses with no end in sight.
2. Unnecessary Student Loans
Getting a bachelor’s degree is absolutely necessary for most well-paying jobs in today’s job market. See “how to multiply your salary in 5 years” for more insight on that.
On the other hand, the type of education and how much of a student loan you get will determine if it’s a worthy investment.
Based on multiple national surveys conducted by Gallup, hiring managers in general do not care much about where the job candidates got their degrees from.
From my personal experience, one’s overall competencies and skills are really not learned from school. You learn and develop them while on the job.
Why do you want to borrow an obscene amount of money to get into private school when you can simply and easily get a decent public-school degree just paying in-state tuition?
Did you know “millennials” in America are struggling to pay off their student loans right now?
According to Huffington Post, the average law graduate in the U.S. has a student loan of around $120,000.
But guess what, in this country, the supply of law school graduates outnumbers the demand. That is not a good formula for financial success and you may want to reconsider your plan to pursue the seemingly glamorous legal profession.
By God’s grace, I did not have to pay a dime myself for my two master’s degrees and one bachelor’s degree. My parents paid for my under-grad, while I got full scholarships for both the MBA and Master of Accountancy where I worked for the schools as research or teaching assistants.
Not only did I gain valuable experiences related to my majors while in school, I got to skip all that financial burden by getting good grades throughout my school years.
Of course, my situation is not common at all. However, that might give you some insight on how to avoid carrying hefty student loan as big as a mortgage.
3. Fancy Car Loans
Everyone wants to have a dream driving machine.
But a car is just a car. Unless you spend most of your waking hours in your vehicle, why do you want to take out a car loan for Mercedes when a regular Honda can do just fine for you?
On top of that, some folks also love the smell of new cars.
They HAVE TO replace their existing vehicle with a brand new one every few years, otherwise life is just not as exciting.
But when your budget is already tight, this kind of expensive taste can drive you over the edge pretty easily.
My real estate agent told me a real story that might be a good warning for some folks out there.
One of her clients just secured a mortgage for a house that they’re planning to move in soon. Then, the husband decided to buy a brand-new truck to “decorate the driveway”.
Unfortunately, this purchase happened before the final closing date of the home loan. When the lender double checked debt-to-income ratio again before closing, the loan was declined and withdrawn because the borrowers were already bumping up against the maximum debt level they could carry to qualify for that loan before buying that new truck.
They were that close to their borrowing limit!
It’s quite sad how it turned out, isn’t it?
The bottom line is, always leave some “wiggle room” in your budget and in your life. You shouldn’t max out your credit line, and you shouldn’t squander every dollar you have today or spend the money you don’t have.
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4. Mortgage That You Can’t Really Afford
During the 2008 financial crisis, plenty of home owners couldn’t pay their mortgage on time and a lot of homes were foreclosed.
I remember my pastor at the time had a good talk about that one Sunday morning. He suggested that couples should only buy the kind of house that can be paid off by one income even though both the husband and wife are working at the moment.
That’s true wisdom.
Why? Because you never know what life might bring at any given time.
One of you might lose the job, or you might get pregnant and decide to stay at home and care for the baby full-time for at least couple years.
If the monthly mortgage payment really needs two income to sustain, then you’ve taken out too much debt.
Or, even if you can afford a house payment with just one paycheck, it’ll still be a good idea to live under your means and only buy a house that you’ll have plenty of extra disposable income left over every month after the mortgage payment.
That’s what I did and it’s proven to be a good strategy. Subscribe to the blog to get notified when I publish the article about how I managed to pay off my mortgage in four years.
5. Co-signed Loan For Someone Who’s Not Responsible
Do you have a son or daughter who desperately needs a student loan, a car loan or even a mortgage but they don’t qualify to be the sole borrower themselves?
Out of love for your child, you might be tempted to co-sign the loan knowing she or he may default later and you may have to pick up the slack yourself.
By the same token, your significant other may be the irresponsible one but you decided to co-sign for him.
You are your own master and should be making these critical financial decisions yourself. But if you ask me, I’d say stay away from this type of financial obligations when you can help it.
That doesn’t mean your love for them is any less. There are plenty of other ways you can help your loved ones out without being dragged down by them.
Remember, at least one of you need to be above water to stay afloat.
6. Borrow Money To Invest In Risky Stocks Or Businesses
Stock markets are full of risks and we all know that.
One day our portfolio may be thriving with six figure short-term or long-term gain, the next day one of the companies we invested in filed bankruptcy out of the blue and its stock practically became worthless overnight.
You think this sounds dramatic and unreal? Think again.
This is exactly what happened to one of the companies I invested heavily in years ago. Luckily, most of that loss is just unrealized gain from price appreciations when the times were good, and my initial investment was some extra cash I had on the side to play with.
But imagine if you had borrowed all that money to invest. If something like that happens, you may have to sell your car or house to pay off the loan you took out!
I, for one, would not recommend investment in risky stocks or business adventures if you don’t know what you’re doing.
I know there are a lot of financial advisors and analysts out there who would sell you the idea of putting your hard-earned money into the stock market. I was given that advice by my investment advisor. But I wouldn’t do it again and I will never promote the idea of investing heavily in stock market in my blog.
Here is why and I’ve learned it the hard way myself:
Money that comes easily disappears quickly, but money that is gathered little by little will grow.
If you play in the stock market willy-nilly, it’s just like gambling or playing with fire. Stay away from it, especially with borrowed money.
These are the top categories of debts you want to avoid at all costs. If you take enough precautions and practice self-restraint in your spending habits, financial stability is not something out of reach.
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