Do you ever wonder why you never seem to get ahead when it comes to managing your finances? You’re not alone – and in an era when costs keep going up while wages and salaries often seem stagnant, finding ways to manage your money becomes more and more important. We have a list of common money mistakes that keep people stuck in a financial rut instead of pushing ahead to prosperity.
Shutting down when finances go south
Many people simply refuse to talk about financial problems, and even when they have family members and friends who could help them get through a tight patch, they will not bring their hard times up. The ironic thing about this is that their relatives and friends have likely also suffered through difficult times financially before and can help them with the right advice for their situations. One quick piece of advice can get things going the right way again – all it takes is a willingness to be vulnerable and open.
Spending on a budget that is no longer realistic
Changing jobs and taking a pay cut is a reality for more and more Canadians these days. When this happens, that can mean that you need to turn off the premium cable channels and change gyms from the one with the squash courts and the heated towels to one that is more of a value, even if that means cutting back on socialization. Don’t wait to burn through your savings and max out your credit cards before you adjust your budget.
Hoping that a new startup will eliminate debt
You see ads for new business opportunities popping up all over social media. Sell skin products! Put a decal on your car to generate money! Start a franchise of a 24-hour gym! Make money at home! The problem is that only three of ten businesses make it more than a couple of years, and a lot of the ones that do make it fail to generate much of a profit. It often takes as many as 10 tries for an entrepreneur to succeed in starting a business. Even if your idea succeeds, it takes a while to pay off the debts you incurred getting it off the ground. This doesn’t mean that you shouldn’t start a new business – just don’t view it as your ticket out of debt.
Taking out a line of credit – but just making the interest payments
A line of credit often sounds like a great lifeline. Interest rates are comparatively low, and you often only have to pay the interest each month or a low minimum payment. However, over time, this can become a way of life, and you end up throwing interest away each month. If you add to that line of credit, that “low” payment can grow into a larger payment, and your debt stacks up.
Retiring while still paying a mortgage or holding a large amount of debt
More and more people are making this decision, and they are paying the price as a result. They used credit to keep their lifestyle at a certain level, and now they have retired and want to keep spending at the same level. We talked about the dangers of keeping your spending levels constant when your income goes down, and for those who have not saved adequately to maintain income levels after retirement, this change can be a real wrecking ball for your finances. This means that it is time, before you retire, to work your way back to the point where credit cards are not a necessity each month.
Making major purchases or commitments during a financial transition
If you are in between jobs, it is not the time to sign a mortgage with 30-year amortization. It also may not be the time to start a family. It may not even be the time to upgrade your car. Why? When you are in a period of transition in your life, making a long-term financial commitment can lock you into payments that you cannot afford. At the time, making the commitment can give you feelings of happiness and optimism – but when that commitment turns into a real problem for you, then things can go south for you – not just financially but also in your relationships. Secure your financial situation before you make these types of purchases or commitments.
Making double mortgage payments – but failing to maintain a financial safety net
If you have the means to do so, paying ahead on the principal of your mortgage is a terrific financial idea. The cost of financing a mortgage is extremely high, and when you shave off principal each month, you also shave off interest expense. The problem comes when you do so without emergency savings. Too many homeowners end up having to take out home equity loans when emergencies crop up because they do not have enough of a safety net in terms of savings or credit cards. So take a balanced approach until you have at least six months’ worth of savings in the bank, before you start getting aggressive with your mortgage payment.
Living without a budget
No matter how much money you make, without a clear budget in place, it is easy to spend it all and then some, thinking that it will be easy to pay off your balances because of your income. It is much easier, over time, to live within your means. That way, you don’t end up with ugly financial surprises at the wrong time.
If you find that your finances are out of control, and you need some help restructuring a significant amount of debt, a private short-term mortgage can be one answer. The term would likely be no longer than a year or two – and you need to make sure that you have a clear exit strategy. Given the interest rates involved, you don’t want to have to renew – and you don’t want to end up in a situation where the lender denies renewal and you are stuck looking for help.
If a private mortgage isn’t an option, reach out to a licensed Trustee to talk about options for bankruptcy or consumer proposals to work on a plan with your creditors.