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Be Wise With Money

Don't Get Caught in These 5 Financial Traps

Want to get financially fit? Avoid common money traps with these tips

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Thrivent Financial representatives share some of the most common money traps they see and how to avoid them by changing your habits. Follow their ideas, and you'll be able to pay off debt sooner, save more and worry less.

5 financial traps

TRAP 1: Using credit cards to live beyond your means

The majority of Americans who have credit cards carry a balance on them from month to month, according to the Federal Reserve Board. And the average credit card holder pays a whopping 15% interest rate on balances, creditcards.com reports.

"If you carry a balance on your credit card, it means you're living beyond your means," says David Weliver, founder of the financial advice blog MoneyUnder30.com.

"There's nothing good about credit card debt," says David Passehl, a Thrivent Financial representative in Shawano, Wisconsin. "It's a terribly expensive way to borrow money."

Avoid the trap: Put your credit cards away, and double or triple your minimum payments every month until the balance is paid off. If you have a balance on more than one card, pay off cards with the highest interest rates first, Passehl says. Or, if it will make you feel like you're making progress more quickly, pay off the card with the lowest balance.

TRAP 2: Confusing wants with needs

Needs include things like mortgage or rent, food, basic clothing, insurance payments and savings, says Chris Benson, a Thrivent Financial representative in San Francisco. Wants are all the extras – everything from dining out to taking a vacation and buying a more expensive car.

Avoid the trap: Benson suggests having your paycheck automatically deposited into separate "needs" and "wants" checking accounts, to make sure you're covering your month-to-month expenses.

"When you spend money on extras, don't use a credit card; use an ATM connected to your wants account," Benson says. "It's amazing how often people decide they don't need something once they realize the money for it can only come from the cash available in their wants account."

TRAP 3: Not saving enough

"If you're not contributing to a 401(k) or some other kind of retirement account every month, you aren't saving enough money," Passehl says.

Generally, financial experts recommend putting away 10% to 15% of your income for retirement. It's also important to have some short-term savings for emergencies, so you don't have to use a credit card to replace a major appliance or pay for an unexpected auto repair.

Avoid the trap: Think of putting money into savings – both into a retirement account and a cash savings account – as paying yourself first.

And when you get a salary increase, save part of the additional income, Weliver says.

TRAP 4: Charging big-ticket items

When you buy things like appliances or electronic equipment, you're often given the option of 12-month financing at zero interest. It may seem like a good deal, Benson says.

"But the truth is, this is a bad option because most people don't pay off the debt in a year," Benson says. "If you don't pay the balance in full within the first 12 months, interest is charged back to your account from the purchase date. That means that you'll end up paying 20% or more on top of the item's original price."

Avoid the trap: "First, simply don't accept the offer. Instead, set a limit on how much you'll allow yourself to spend on an impulse purchase," Benson says. "If the item you want is over that amount, make yourself wait 24 hours before you buy. You're likely to never look back."

If you still really want the item, he suggests you put aside a little money each week until you have the cash to buy it outright.

TRAP 5: Getting cash back when you make purchases with your debit card

Often when you use a debit card, you're given the option of getting cash back, typically in the amount of $20 or $40.

"Pulling that extra cash out can deplete your account quickly," Benson says. "And that $20 or $40 will seem like free money: You're apt to spend it without even thinking about it."

Avoid the trap: "Don't ever say 'yes' to cash back," Benson says. Instead, every time you resist the temptation, transfer $20 to your short-term savings account.

Take the 21-day challenge

It takes at least 21 days to replace a bad habit with a good one, according to a widely accepted rule of thumb. Our experts offer three ways to adopt better money habits in three weeks.

  1. "Follow every penny," says Chris Benson. "Write down every single thing you buy or pay for. A cup of coffee and a muffin, for example, can cost $7 or more. If you treat yourself several times a week, it adds up quickly. Following every penny will reveal your true spending habits."
  2. "Put your credit cards on ice, literally," says David Weliver. "Freeze your credit cards in a block of ice to eliminate the temptation to use them. Determine how much cash you'll need to cover basic expenses and a few extras for the next 21 days; withdraw that amount from an ATM and don't use anything but cash until week three is over."
  3. Use the 21 days to plan how you want to spend your money over the next year and save ahead, David Passehl recommends. "Create a monthly savings budget for the things you want in the near term, like a vacation."

 

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