Unlike other mistakes, financial blunders and misunderstandings can have serious consequences. In order to avoid these problems, consider the following five financial mistakes and how to avoid them.
The Never-Ending Story is entertaining, but never-ending payments are clearly not. Many consumers convince themselves that superfluous entertainment and luxury items are necessary for satisfaction and a minimum lifestyle. However, subscription services like cable TV, satellite radio and video games are unnecessary indulgences that undermine financial stability. Keep in mind that psychology research clearly shows that as people experience more consumer options and choices, their overall sense of satisfaction decreases.
Living on Credit Cards
Stagnant wages and a sluggish economy mean that consumers must rely on credit cards to buy basic home essentials. Even though this may be socially acceptable, it is still financially unwise to depend on credit cards for financial transactions. Bear in mind that credit card companies take advantage of the fact that people naturally seek instant gratification. Thus, a credit card empowers them to enjoy now what they cannot even afford currently or in the future. Always remember that APR interest rates of 21 percent result in the purchased item being much more expensive, even if it’s a good deal or on sale.
When people think of excessive spending, they tend to think of department store purchases. In truth, numerous small purchases quickly add up to hundreds of dollars per month. However, there are also major purchases and investments that contribute to financial instability. For example, some people do this when they focus too much on complex investments or increase the risk level of the 401(k) portfolio. Impulsive financial decisions without sound financial knowledge will only waste money. Thus, consumers should consider learning more about finances and even consulting with a financial professional if needed.
Living without a Savings
Many consumers understandably live paycheck to paycheck because the cost of living is higher than standard salaries. However, consumers cannot enjoy a high standard of living without building up permanent debt with high interest rates. Instead, consumers should focus on financial moderation while slowly, yet consistently building up an emergency savings. Many consumers also forget that the interest earned on a savings account is better than the interest paid through credit cards.
Buying a New Vehicle
Every day, engaging and impressive car commercials flood media platforms. For example, television is the primary way that car manufactures visually push and manipulate consumers into buying a new vehicle that they cannot afford. In fact, although millions of new cars are sold every year, only a small amount of consumers can afford to pay cash upfront for them. Therefore, the inability to pay a large amount of cash for a new car should remind the consumer that they technically cannot afford the car.
In short, there are basic and simple mistakes that consumers can avoid every day in order to avoid lifelong debts and obtain financial freedom.