Everybody makes mistakes. But when it comes to money, even little errors can prove devastating.
Bruce McClary, communications director for Clearpoint Financial Solutions, recalls a senior on a tight budget who was getting along fine until a $250 car repair sent her into a tailspin. She borrowed money at double-digit rates that she couldn’t pay back, which was then compounded with late fees. Her mistake was simple: She had no emergency fund.
What are Americans’ most common financial mistakes and how can they be fixed?
At the end of the month, consumers’ pockets are empty and they’re confused. “Where did all the money go?”
David Jones, president of the Assn. of Independent Consumer Credit Counseling Agencies, knows the answer: It went to dozens of little, regular expenditures.
“We have customers who are living paycheck to paycheck, but they’re buying two cups of Starbucks coffee every morning, renting movies at Blockbuster and going to fast-food places for lunch,” he says. “It adds up really quickly.”
McClary calls these expenses “dribblers” because of the slow leaks they create in a monthly budget. He estimates that the typical consumer dribbles out at least $50 to $100 a month, and often far more.
Plugging these leaks is easy once you find them, McClary adds. The solution: Keep a notebook with you and write down every expense, from the $1 candy bar to the $3 latte. At the end of the month, add them up and decide whether the expenses are worth budgeting for or whether they ought to be eliminated.
Some big bills land just a few times a year and wreak havoc with the finances of the forgetful, McClary says.
Auto insurance can be paid just twice a year, for example. Bills for home and life insurance, property taxes, car registration fees -- even some water and waste collection bills -- may be sent annually, quarterly or on a bimonthly schedule. And then, of course, there are holidays and birthdays.
“We see people all the time who think they’ve got all this extra money some months, so they go out to dinner or fly to New York,” McClary says. “Then the periodic expense that they’ve forgotten about comes up. They’re suddenly not feeling so good anymore.”
Pull out copies of all those irregular bills and divide their costs to come up with a monthly amount that needs to be saved. Also estimate the amount you’ll need for holidays and birthday gifts, so you can be saving for these irregular but expected expenses on a regular basis.
Cutting the cushion
Everyone needs an emergency fund, Jones says, particularly in a dicey economy. But when budgets get tight, many consumers stop setting money aside for a rainy day, thinking that they can’t save enough to matter.
Even if all you can save is $5 a month -- or the change collected from your pocket and the couch cushions -- bank it, McClary advises. Small amounts add up and can save you from catastrophe if the car or washing machine breaks or you lose your job.
Making the minimums
Credit card minimum payments can leave you in debt -- at double-digit rates -- for the rest of your life, Jones notes. If you make only the minimum payment on a $10,000 loan at 18%, it will take 42 years to pay off that debt. And it will cost you many times the amount you originally charged.
The best idea is to use credit cards just for convenience, paying them off each month. If you can’t do that, at least pay more than the minimum.
Saving the kids
Parents in financial trouble often try to keep their woes from their children, thinking that they’re saving the kids from worry. That’s a bad approach for two reasons, Jones says.
First, left to their own devices, kids can be consummate consumers, demanding $150 tennis shoes and racking up monster bills on their cellphones. But Jones says he’s found that when asked to help, teenagers can be extremely useful, finding dozens of ways to pitch in and cut costs for their families. Being involved in the family money discussions also teaches them about finances and may make them savvier consumers later in life, he says.
Ignoring fine print
There are dozens of little traps in the fine print of financial agreements such as credit card contracts and mortgage loan documents. People who don’t read these documents often get blindsided by penalty fees that can cost them thousands of dollars, McClary says.
When you enter into a financial transaction, read the fine print and keep a copy of the document you signed, he advises. If you don’t agree with the terms, don’t sign the deal. If you do sign, make sure you don’t violate the terms of the agreement.
Some traps to watch for: over-limit and overdraft fees; prepayment penalties; and penalty interest rates, which kick in if you have a late payment or two.
Missing signs of trouble
If you’re able to pay only the minimum payments on credit cards for two months in a row; if your credit card debts exceed 15% of your take-home pay; if you’re making payments late or regularly juggling bills because your paycheck isn’t stretching far enough, then you need help, experts say.
Sit down and create a budget. If you find that you can’t do it alone, seek help from a nonprofit credit-counseling service. But be careful when choosing counselors.
The Federal Trade Commission recently testified before Congress about some debt-management companies that left consumers in worse condition than when they started.
The agency offers a guide on finding credit counselors that includes questions to ask and warning signs to watch for. The link: https://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.