Top Six Financial Traps To Avoid

Posted on June 28, 2007

The simplest way to avoid debt is to earn more than you spend. Over time you will create savings and avoid the following financial traps. For most of us controlling expenses is easier said than done, and requires discipline, diligence, and education. But you have to start somewhere, even if it is at the very bottom. Frequently I see 20-somethings fresh out of college falling into financial traps that perpetuate their problem, never fully allowing them to get out of the debt cycle. Here are the top six financial traps to avoid as you climb out of debt:

Cars. So you are making a decent income now and can technically afford the BMW or Audi of your choice. Avoid those at all costs early on no matter how much peer pressure you feel. Purchase the car you can afford or take out the shortest loan possible (three year).
Student loans. I understand the difference between good debt and bad debt. However, student loans are pushed so hard at colleges that it often feels like income and will not have to be paid back. It can be so easy to get more loans each semester that by the time you reach graduation you have a mountain of debt to start your “adult” life off with. The point is be cautious with student loans and only take what you need. Do not accept student loans to upgrade your lifestyle. On the other side do not let student loans hold you back from getting more education. If you need the assistance of a student loan by all means go for it. Just be cautious.
Housing. Many personal finance books preach not spending more than 2 to 2.5 times your income on a home purchase which does not get you a lot in most areas. For a recent college graduate earning around $50K that only translates to a $150K home. Even in Orlando, which is fairly reasonable, that will not get you much at all at least in a safe area. The point here is do not purchase the home the bank will finance you for. Often times they will finance you for much more than you should actually spend. Purchase a home within your means.
Going Out To Eat. When I was straight out of college and even in college this was a huge expense for me. I was eating out at least one and sometimes 2 or 3 meals a day. I have since cut that way back by learning how to cook better and planning my grocery shopping trips. Even if you are so busy you don’t have time to cook be aware of how much you are spending here.
Credit Cards. Debt can be very addicting. Why wait and save up for an item when you can have it now for a low monthly payment? Eliminate all credit card debt period.
No Emergency Savings Fund. With an emergency savings fund you won’t always have to use the credit card when unexpected expenses arise. Have money taken directly from each paycheck to fund this account and do not touch it as much as possible.