- Excessive and Frivolous Spending
Great fortunes are often lost one dollar at a time. It may not seem like a big
deal when you pick up that double-mocha cappuccino or have dinner out
or order that pay-per-view movie, but every little item adds up.
Just $25 per week spent on dining out costs you $1,300 per year, which
could go toward an extra credit card or auto payment or several extra
payments. If you’re enduring financial hardship, avoiding this mistake
really matters—after all, if you’re only a few dollars away from foreclosure
or bankruptcy, every dollar will count more than ever.
2. Never-Ending Payments
Ask yourself if you really need items that keep you paying every month,
year after year. Things like cable television, music services, or high-end
gym memberships can force you to pay unceasingly but leave you owning
nothing. When money is tight, or you just want to save more, creating a
leaner lifestyle can go a long way to fattening your savings and cushioning
yourself from financial hardship.
3. Living on Borrowed Money
Using credit cards to buy essentials has become somewhat commonplace.
But even if an ever-increasing number of consumers are willing to pay
double-digit interest rates on gasoline, groceries, and a host of other items
that are gone long before the bill is paid in full, it’s not wise financial advice
to do so. Credit card interest rates make the price of the charged items a
great deal more expensive. In some cases, using credit can also mean
you’ll spend more than you earn.
4. Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to
pay for them in cash. However, the inability to pay cash for a new car can
also mean an inability to afford the car. After all, being able to afford the
payment is not the same as being able to afford the car.
Furthermore, by borrowing money to buy a car, the consumer pays interest
on a depreciating asset, which amplifies the difference between the value
of the car and the price paid for it. Worse yet, many people trade in their
cars every two or three years and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but
how many consumers really need a large SUV? Such vehicles are
expensive to buy, insure, and fuel. Unless you tow a boat or trailer or need
an SUV to earn a living, it can be disadvantageous to purchase one.
If you need to buy a car and/or borrow money to do so, consider buying
one that uses less gas and costs less to insure and maintain. Cars are
expensive, and if you’re buying more of a car than you need, you might be
burning through money that could have been saved or used to pay off
debt.
5. Spending Too Much on Your House
When it comes to buying a house, bigger is not necessarily better. Unless
you have a large family, choosing a 6,000-square-foot home will only
mean more expensive taxes, maintenance, and utilities. Do you really want
to put such a significant, long-term dent in your monthly budget?
6. Using Home Equity Like a Piggy Bank
Refinancing and taking cash out of your home means giving away
ownership to someone else. In some cases, refinancing might make sense
If you can lower your rate or if you can refinance and pay off higher interest debt.
However, the other alternative is to open a home equity line of
credit (HELOC). This allows you to effectively use the equity in your home
like a credit card. This could mean paying unnecessary interest for the
sake of using your home equity line of credit.1
7. Living Paycheck to Paycheck
In June 2021, the U.S. household personal savings rate was 9.4%.2 Many
households may live paycheck to paycheck, and an unforeseen problem
can easily become a disaster if you are not prepared.
The cumulative result of overspending puts people into a precarious
position—one in which they need every dime they earn and one missed
paycheck would be disastrous. This is not the position you want to find
yourself in when an economic recession hits. If this happens, you’ll have
very few options.
Many financial planners will tell you to keep three months’ worth of
expenses in an account where you can access it quickly. Loss of
employment or changes in the economy could drain your savings and
place you in a cycle of debt paying for debt. A three-month buffer could be
the difference between keeping or losing your house.
8. Not Investing in Retirement
If you do not get your money working for you in the markets or through
other income-producing investments, you may never be able to stop
working. Making monthly contributions to designated retirement accounts
is essential for a comfortable retirement.
Take advantage of tax-deferred retirement accounts and/or your employersponsored plan. Understand the time your investments will have to grow
and how much risk you can tolerate. Consult a qualified financial advisor to
match this with your goals if possible.
9. Paying Off Debt With Savings
You may be thinking that if your debt is costing 19% and your retirement
account is making 7%, swapping the retirement for the debt means you will
be pocketing the difference. But it’s not that simple.
In addition to losing the power of compounding, it’s very hard to pay back
those retirement funds, and you could be hit with hefty fees. With the right
mindset, borrowing from your retirement account can be a viable option,
but even the most disciplined planners have a tough time placing money
aside to rebuild these accounts.
When the debt gets paid off, the urgency to pay it back usually goes away.
It will be very tempting to continue spending at the same pace, which
means you could go back into debt again. If you are going to pay off debt
with savings, you have to live like you still have a debt to pay—to your
retirement fund.
10. Not Having a Plan
Your financial future depends on what is going on right now. People spend
countless hours watching TV or scrolling through their social media feeds,
but setting aside two hours a week for their finances is out of the question.
You need to know where you are going. Make spending some time
planning your finances a priority.
The Bottom Line
To steer yourself away from the dangers of overspending, start by
monitoring the little expenses that add up quickly, then move on to
monitoring the big expenses. Think carefully before adding new debts to
your list of payments, and keep in mind that being able to make a payment
isn’t the same as being able to afford the purchase. Finally, make saving
some of what you earn a monthly priority, along with spending time
developing a sound financial plan.