Risk Management

5 Financial Pitfalls to Avoid


The myriad of financial deceptions that exist today can trap even the most money savvy. Unfortunately, these traps loom at every turn and are often well disguised causing one to become entangled in a mess of wasteful spending. Remaining mindful of spending habits down to each and every last dollar spent helps keep your long term goals in perspective and avoid a sabotage of your financial well being.


Avoid the following financial traps to ensure your financial future and keep your wallet full.

  1. Borrowing from Savings – Borrowing from your savings account with the intention of repaying at a later is a dangerous habit. This can become quite complicated, leading to the use of credit while trying to repay what you have borrowed from savings with the expectation of future money. A savings account should be reserved for emergencies or significant purchases such as a home, not for an impulse use of funds today that you may be in need of tomorrow.
  2. Zero Interest Rate Offers – At the outset, a 0% interest rate financing offer may seem to make sense when utilizing it for a large purchase such as a computer, TV, or home appliances etc., and often can be of a benefit if managed properly. However, a 0% offer is still debt regardless of how you slice it and debt requires a monthly payment with guaranteed hefty penalties if missed. A predicament often arises down the road as initially an assumption was made that you would have the money to pay off the debt before the deadline of the 0% interest offer when suddenly you are hit with interest that has accrued during the length of the financing term. A great rule of thumb in this type of situation is if you can’t afford to purchase outright you simply can’t afford it.
  3. No Budget – Preparing a monthly budget is nothing short of laborious and time consuming but is vital in remaining solvent in an environment full of financial traps. Planning out monthly expenses is only one side to the equation and the ability to follow the plan is the where real discipline is required. Realistically, an exact number to abide by every month is virtually impossible as expenses vary and even the occasional unexpected surprise. On the other hand, consistently ignoring over spending can lead to borrowing from another source, such using a credit card, to offset the difference needed to cover expenses. Read more about the detriments overspending can cause in this Forbes article. This practice will eventually put you back in to the vicious debt cycle. Create a plan to live within your means and stick to it.
  4. Small Down Payment on a Home – Purchasing your dream home is tempting especially with rates being at all time lows as of late. Real estate is an investment and just like the stock market, economic swings do happen and affect the value of your home. Thus, scraping together the bare minimum required for a down payment greatly increases your monthly payment and potentially puts you in an “upside down” situation and then foreclosure becomes a very real possibility. Only buy a home when you can afford it, preferably using 20% down as a benchmark. Yahoo Finance has a great home affordability calculator.
  5. Leasing a Vehicle – On the surface, leasing a vehicle may appear to be a cheap alternative to finally drive the car you have desired. Multiple “sign and drive” offers exist and trap innocent individuals into a several year commitment with no residual value at termination. According to the National Auto Dealers Association, the car companies make more money on leasing programs than if the car was purchased with cash. To avoid frustration and an impact on your wallet don’t ever sign a lease. Buy a cheaper car you can afford to purchase with cash.


The Bottom Line

This list is far from exhaustive but just a few of the financial pitfalls that exist and are out to sabotage your financial peace. Financial traps greatly impact the good intentions of saving and ultimately affect the ability to experience true financial freedom. The majority of mistakes are made in the heat of the moment, failing to think through the potential consequences. Properly planning ahead and completing thorough research prior to making a decision will save you thousands over time. The ability to enjoy the benefits of wealth in result of your saving plan at the present and in the future, as well as managing it properly for your family requires careful consideration. The simple truth is that wealth is built on strict discipline and hard work. Living a smarter, more aware lifestyle an engaging in even smarter behaviors is very rewarding and will yield great success!