Recognizing Financial Pitfalls

By Dan Thompson

Today we live in a world of easy credit – which means easy debt. Banks and finance companies are always out to grab hold of people and shackle them with debt for the rest of their lives because that is how they make their money. So if you have bad credit and no savings, no problem, there are plenty of pay day loan locations willing to gouge you with extremely high interest rates in exchange for a few bucks.

Sadly, most people use pay day loans for things that should never be paid for with borrowed money, for instance, an electric bill, or a phone bill, groceries, or missed car payments. Why? Pay day loan shops can charge 30% or higher for short term loans.

If you are struggling to make a $100-dollar cell phone payment, how will borrowing $100 now and then having to actually pay back $130 help? Once in this pay day loan trap, it’s almost impossible to get out.  You get sucked into a whirlpool, spinning downward, as interest charges pile upon more interest charges, making it a monumental task to swim out from underneath them.

And what you may not know is that pay day loan shops are not all that profitable. I’m sure some do fine, but the amount of losses they write off due to bad loans almost equals their profit and justifies the high interest rates they charge.

After 35 years of being a financial advisor, I’ve seen almost everything. I’ve run into several situations over the years where I remember thinking, “Wow, if these people would just change a few habits, they might be able to improve their situations.”

One was a couple in their 30’s. They had good jobs over the years but had never really saved any money, and debt and spending had overtaken their finances. When it came to cars, instead of choosing one that was affordable for their circumstance, they always bought the nicer, more expensive car and strapped themselves with a payment that would stretch their finances to the brink of disaster. Then they repeatedly needed to borrow money to make their car payment to avoid having their car repossessed. So, they would go to the payday loan places, get the money to make the car payment and then have a substantially larger payment to make back to the payday loan shop at 30+% interest. They also relied on family at times to bail them out and make payments for them. It put a strain on the family relationships as well. They fell for the illusion that they deserved that more expensive car, and therefore began living beyond their means.

I also see people engage in spending patterns that seem like small, insignificant expenses, but add up fast and can cause financial trouble.  Whether it is buying a coffee or soft drink a couple of times a day, getting hair and nails done at the salon, or eating out frequently, it all adds up to hundreds of dollars a month!

Taking the time to analyze where your money goes each month can be eye opening.  2/3 of adults spend money on coffee each week, the average American spending $80-$90 per month.  Add to that the cost of sodas and alcohol expenditures, eating out, and multiple trips to the nail and hair salons and you’ve got some expensive habits that can really add financial stress to your life. Suddenly you’ve maxed out your paycheck, but worse, you’ve left yourself with nothing to save or invest.

In the above car scenario, if they would have bought a car at half the cost, they could have saved $200 per month in car payments. Cutting out just half the beverages and eating out, that would be another $150 dollars a month in their pocket. Finally, maybe only doing the hair and nails every so often could save another $100 per month. All told, we could easily have found $450 to $500 per month and not drastically changed their lifestyle.

The problem was the choices they were making. The burden they imposed on themselves – and others when they needed money – was unnecessary.  Now let’s suppose rather than waste $500 per month having it slip through their fingers, that they saved this money instead. In a year’s time they would have $6,000 saved.

To take it one step further, what would happen if they saved this same $500 per month for the next 30 years. Let’s say these folks were 35 years old.  We have one program where we only project a 7% return. In 30 years, it would send off over $100,000 per year, tax free, the rest of their lives.

Now think about that.  The cost of Starbucks, and Coca-Cola, and painted nails, and styled hair, and eating out didn’t just cost them $400-$500 per month, it cost them over $100,000 per year in annual retirement income.

Now, suppose they could only save half that much?  That still means if at age 35 they were to save $250 per month, they could have over $50,000 per year in tax free income the rest of their lives.

Often times the choices we make and our spending habits cost us far more than a few bucks here and a few bucks there.  It’s pretty simple, money has a magical power to grow and compound if you leave it alone.  So next time you are buying a cup of coffee or a soda pop instead of saving that money, think about what you are giving up.  You are literally driving, eating, and drinking your future away. You are missing out on letting your money work for you by the choices you make today.

I often hear, “Well, what’s a dollar?”  or, “It’s only 5 bucks.”  But at the same time this person can’t save a dime, has no money, and when in a bind, has to call family for help. When we just take a bit of responsibility, spend less, buy a less expensive car, and practice self-reliance, we will be surprised how fast a little nest egg can grow.

Look, no one wants to live a life where you can’t enjoy a little along the way. I don’t want to be the guy saying, “No you can’t have a soda pop.” However, making good financial decisions is a process.  Be responsible and then have some fun. Put your house in order, save some money, get out and stay out of debt, and with just a bit of sacrifice you can massively change your future….and generations to come.

Dan Thompson, Financial Advisor and owner of Wise Money Tools

He produces a weekly video and podcast at www.wisemoneytools.com