Debt is unavoidable in our country. If you want to buy a home, you have to take out a home loan. If you want to pursue higher studies, then you have to take out a student loan. And, if you have to buy a car, then you have to opt for an auto loan.
Barring auto loans, both student loans and mortgage are good debts because they help you to attain a job and a roof above your head. The fair market value of a car depreciates with time. So, an auto loan is considered as a bad debt.
Other than auto loans, credit cards are also considered as bad debts as these are mostly unplanned debts. Usually, people use credit cards to fulfill their various wants and desires. But we humans are greedy. We have too many wants and desires. So we end up using credit cards for fulfilling our desires, one after one, and increase our financial liabilities. There is yet another instance when we use credit cards, and that is during emergencies. This can be fatal if the bill is of a huge amount. Recently, a friend of mine had to spend $7k for renovating his home. A portion of his home got damaged due to the onslaughts of natural calamity.
Unplanned debts and bad debts make our overburdened life stressful. We lose mental peace, sleep, and sanity. Most of us wouldn’t want to face that.
Here are a few financial mistakes that get you into debt. Avoid these mistakes by all possible means if you wish to avoid getting bankrupt.
1. Not having a personal budget:
The plus side of having a personal budget is that you can keep your finances under control. You can avoid debts since a budget works on the principle of spending less than what you earn. The negative side of following a personal budget is that you have to be under control when it comes to spending money, which is good actually.
Not having a personal budget is a big financial mistake. It could drop you in a debt pool anytime due to unplanned expenses. So if you don’t have a personal budget, then create one as soon as possible.
Just keep in mind a few basic points before creating a budget:
- The budget is reasonable. It’s not too tight nor too relaxed.
- The budget takes both your income and expenses into account.
- The budget includes both necessary and unnecessary expenses.
- You have to spend less than what you earn.
- You have to follow the budget every month.
- You have to modify your budget plan when your situation changes.
- You have to make tough financial decisions. For instance, you may have to stop dining out and eat home-cooked meals.
If you need help, then download a budgeting application to track your expenses.
2. Not buying an insurance policy:
Insurance premiums are quite expensive. There is no doubt about that. But they can help you save thousands in the long run. Not having an insurance policy is not good for your financial health, and it can drain your bank accounts. A serious medical issue is enough to empty your savings account. Even an emergency fund won’t help to cover your medical bills.
Analyze your family’s financial needs and buy adequate insurance policies. Speak to an insurance agent to know how you can get your family covered.
Financial experts say that it’s best to buy insurance policies when you’re young. This is because insurers charge small premiums on young people.
3. Using credit cards recklessly:
Credit cards can give you everything. They can give you beautiful clothes, the latest smartphones, stylish accessories, and so on. But they also give you the worst form of debt. The interest rates on credit cards can go above 30%, and that can increase your outstanding balance rapidly. Too much use of credit cards can also swell your credit utilization ratio, and that can pull down your credit score.
It’s not bad to use credit cards as long as you earn rewards. But make sure you track how much you’re charging on your credit cards. Try to keep your credit-utilization ratio within 30% and pay what you spend every month.
If you’re already in credit card debt, then use the extra cash to repay your bills. If you don’t have extra cash, then use a few debt repayment strategies like credit card debt settlement and credit card debt consolidation to attain financial freedom. Read: How to consolidate debts in the most effective way
4. Not having a fat financial cushion:
An emergency fund acts as a savior during troubled times. It helps you to tackle medical emergencies and unemployment smartly. Without an emergency fund, you’ll be in soup and it will be tough to survive without credit cards.
Undoubtedly, credit cards will help you get over the temporary financial crisis but that would push you towards bigger problems in the long run.
Create an emergency fund if you don’t have one. Set aside a certain amount from your paycheck every month and keep it in your savings account. Build your emergency fund gradually until you meet your financial goals. Once your emergency fund is exhausted, make it a point to rebuild it.
Analyze how much you have saved in your emergency fund once a year. Increase your emergency fund when you get a pay hike or you get hitched.
Your financial life is in your hands. Your financial moves will determine how your life will be. Try to avoid making costly money mistakes if you wish to live in a rock-solid financial house with a calm mind.