Worried about money matters and that you’re on the verge of getting into debt? There may be a few things you can do to turn your financial situation around and start maintaining a healthy bank balance. This post highlights five financial mistakes to avoid to keep yourself out of debt.
1. Poor budgeting and overspending
Budgeting is an essential skill that you should master to keep track of your finances and identify areas of overspend. Being accountable for every transaction can help you monitor your balance, predict future expenses and avoid overdraft fees or debt incurred by running out of money before payday.
Sticking to a budget can seem quite restrictive and tedious, especially if you jot down your expenses in a notebook or a spreadsheet.
A personal finance app for your mobile can simplify the process, however. You’ll have your phone with you at all times, making it easier for you to log expenses and get a clear view of your finances whether you’re at home, at work, or on-the-go. For detailed reviews on some of the best finance apps around, head over to OverdraftApps.com.
2. Having a “You Only Live Once” (YOLO) mindset
The YOLO mindset is all about living for the moment without worrying about what might happen in the future. While this mindset might make you feel happier in some respects, when applied to your finances, you can end up in big trouble.
Splurging on items that you can’t really afford for a few moments of satisfaction can lead to the accumulation of debt. The YOLO situation has even more of an impact if you have a carefree attitude to debt repayment.
For example, if you think, “I can afford the minimum repayments on my credit card, so buying that pair of shoes won’t make much of a difference,” this is where you could be bordering on dangerous territory.
It only takes a change in circumstances for minimum payments to suddenly become unaffordable. And you could end up paying way more than you need to in interest if you don’t pay off your debt in full as quickly as possible.
3. Getting debt consolidation wrong
Debt consolidation is where you might take out a new credit card or loan with a low rate of interest in order to pay off existing debt. The problem that can arise with debt consolidation is if you don’t take measures to get rid of the initial debt or line of credit.
Here’s an example. Let’s say you have a credit card balance of $3,000 and you’re paying an extortionate rate of interest. You successfully apply for a low-cost loan for the same amount and transfer your credit card balance. You celebrate as you’re now paying a measly amount of interest on your debt!
However, you decide to keep your credit card open in the hope of boosting your credit score (length of credit history can have a positive impact). Over time, you start adding purchases to your credit card for things that you need, or want, but can’t afford to pay for outright. Hence, you could end up paying off your loan and new debt on your credit card too (at a high rate of interest).
4. Not having an emergency fund
According to Statista, 45% of Americans have $0 in their savings account and around 70% have less than $1,000 stashed away. A financial emergency, like job loss or even a single car repair, can be enough to tip you over the edge into debt, especially if you’re living paycheck to paycheck.
Many financial experts agree that you should aim to set aside three to six months of expenses, just in case something unexpected happens and you’re forced to rely on savings. Case in point – the unprecedented situation with coronavirus is leaving many people worrying not just about their health, but their finances too.
5. Not having health insurance
This recently published report from the United States Census Bureau claims that 27.5 million Americans didn’t have health insurance at any point during 2018. That’s a lot of people who left themselves open to the consequences of unexpected medical bills.
Health insurance isn’t mandatory at a federal level but some states will penalize you if you don’t have coverage. Though you can save money by not paying insurance premiums, you could face serious financial difficulty if you have an accident or become ill. Sadly, many people are forced into bankruptcy each year because they can’t pay their medical bills.
Tips to combat living life in the red
If you’re worried about money matters, you may be able to get your finances back on track by avoiding these mistakes above. Specifically, be sure to:
- Budget effectively – that means checking your bank balance and transactions daily.
- Get into the right money mindset – avoid spending frivolously on impulse and instead, set yourself some savings-orientated goals.
- Pay off your existing debt – aim for debt elimination rather than debt consolidation.
- Build an emergency fund – start with a goal of saving $1,000 and then add more each month until you have at least three months worth of expenses.
- Consider health insurance – if you don’t have it already and compare providers to get the best deal you possibly can.
Each of these tips above can help you get your finances back on an even keel and working towards a healthy bank balance.