Every single week, I talk to a lot of people who have managed to find a variety of ways to screw up their finances. Now when I use the phrase “screw up their finances”, I mean that ownership of their financial problems rests squarely on their shoulders.
In my experience, I’ve found that most people that are going through financial problems didn’t get there through bad luck, some unexpected disaster, or because of who is living in the White House. Most of them got there through their own bad financial decisions or financial neglect over a long period of time.
It’s a pattern that I've seen time and time again.
Screwing Up Your Finances is Preventable
Of course, bad financial decisions are easily preventable with a little education and some financial discipline. Neglect, on the other hand, is the result of burying your head in the sand and having total disregard for the reality of your situation.
Both scenarios will screw up your finances in a major way.
Both are also totally preventable.
Being Intentional Brings Financial Freedom
But if you wait until you have financial trouble before seeking help, it ends up being much harder to improve your financial situation and live the life you want. That’s why I believe in being intentional with your finances. You have to be proactive and find ways to take complete control so you end up in prosperity and financial freedom, instead of bondage and lack of choices.
That’s where I come in.
Today I thought I would show you some of the most common ways that people screw up their finances. I'll also include a solution for each one.
Once you’re armed with that knowledge, you’ll know better how not to screw up your finances and make better decisions for you and your family.
8 Ways to Seriously Screw Up Your Finances
This is certainly not an exhaustive list of ways to screw up your finances, just the most common. Have you done any of these?
Not Thinking About the Future
A lot of people worry so much about the present they forget they need to prepare for the future. It’s easy to get preoccupied with paying today’s bills and that you don’t put money into savings. That’s a huge mistake that will keep you poor in your old age.
Solution: Have money automatically deducted from your paycheck into your IRA and/or 401k. When it’s automatic you don’t have to think about it and you can build a sizeable nest egg over time.
Not Having an Emergency Fund
Emergencies will happen. It’s inevitable that at some point your kid might break an arm, you could have a car crash, or your HVAC needs to be replaced. Yet most of us aren’t prepared for emergencies we know are going to happen.
Solution: Take the time to build a solid emergency fund so you don’t have to borrow your way out of the inevitable emergencies in life. When you have emergency cash available you can take care of the problem immediately instead of paying for it for years to come.
Buy More House Than You Can Afford
I’ve seen a lot of people with a really fancy house that can’t pay their bills because the payment is 35%, 40% or more of their income. A fancy house won’t do you any good if the rest of your life suffers because of it.
Solution: Your house payment should be 25% or less of your take home pay. In some very expensive areas that may not be realistic. But the lower percentage of your take home pay the better. Also, you should have at least a 10% down payment when buying a house (more is obviously better).
Get the Wrong Mortgage
The type of mortgage you have can hurt you just as much as the amount of your mortgage payment. You should stick with a fixed mortgage of 15 years or less to minimize the possibility of a major financial screw up.
An interest only, no down payment, or adjustable rate mortgage may sound like great deals, but they’re not. The reason they seem so appealing is because they allow you to have a lower payment. But those lower payments come at a price. You end up actually paying more in the long run, getting less equity and taking on more risk in the process.
Solution: Do your research. Getting the wrong mortgage can screw up your finances in a major way. It could cost you thousands if you get the wrong one. You can read the article below to find out more about buying a home wisely
Taking Out Payday Loans
This usually happens when you don’t have an emergency fund (see above). Payday loans and car title loans are some of the worst things you can do when you need money quickly.
No matter what the ads say, these people are not here to help you. Their job is to charge you an incredibly high interest rate that keeps you trapped in a never ending cycle of loans.
Solution: Never consider payday loans to be a viable option for financing your life. Make sure you have an emergency fund in place.
Spending More Than You Make
The average person spends more than they make. Strangely enough, most of those people don’t even realize it. They just don’t understand why their paycheck never seems to cover their bills. Unfortunately, they believe they have an income problem, when in reality it’s a money management problem.
Solution: You have to have a plan for your money. That means having a balanced budget and keeping track of every dollar so money does not get wasted. Here’s a link to a list of every post I’ve written on budgeting that you’ll find helpful.
I even wrote a book on how to make a budget which you can find here.
Using Credit Cards
Credit cards are convenient, but they are definitely not your friend. Almost everyone who contacts me with a debt problem has at least some credit card debt.
Solution: Keep track with a budget and go cash only using an envelope system. I’ve been doing this for years and it works great if you give it a chance!
Take Out a Home Equity Loan to Pay Off Debt
Yep, the banking industry has convinced us that we should actually take out a loan to pay off debt. In fact, they want you to believe that putting your house on the line to pay off your credit cards and car payments is a wise thing to do.
But here’s the deal- a home equity loan doesn’t change the habits that got you into debt. The result is that many people end up deeper in debt because they feel like they have a little financial breathing room again. They revert back to using credit cards and loans as much as they did before, eventually putting their house in jeopardy.
Solution: Never use your house as collateral for unsecured debt. To get out of debt and stay out, you have to change the habits that got you there in the first place. Taking out a loan to pay off another loan never works.
You Have Complete Control Over Your Finances
Of course, these aren’t the only ways to screw up your finances. There are plenty of others I could cover. The point is, your finances are something that you have complete control over if you choose to do so.
It’s not always easy to exercise that control, but the more effort you put into it, the easier it becomes over time.
Turn Financial Screw Ups Into Financial Freedom
If you’re looking for a great way to start developing the new habits it takes to get out of debt and change your financial life permanently, you might want to check out my Celebrating Financial Freedom online course. It will teach you everything you need to know. You'll turn your financial screw ups into a lifetime of financial freedom!
Question: Have you ever had a financial screw up that you learned from? Me too. Leave a comment here and tell me about yours and what you learned from it.