3 Ways to Avoid Common Financial Pitfalls

Everyone makes money mistakes sometimes, and if you do find yourself in financial trouble, it’s not always as a result of your actions.

However, there are steps you can take to decrease the likelihood that you will face a crippling personal financial crisis.

 

Have Emergency Savings

Every financial article out there includes this tip, but that’s because it’s so critical. The difference between having three or six months in income saved versus nothing at all can turn an unexpected $1,000 car repair from a crisis to something you can easily absorb.

When you don’t have that cushion, relatively small money issues can quickly turn into large ones as you turn to credit cards or even payday loans to get cash quickly. Before you know it, you are sinking into high-interest debt, and it can take a long while to recover.

If you are struggling to build an emergency savings account, try putting away even a small amount of money from every pay period.

This fund is so important to your financial security that you might even want to consider taking a temporary second job until you have a comfortable cushion.

 

Talk to Your Partner About Money

If you are married or in a serious relationship in which your finances are mingled at least partly, you both need to be as transparent as possible about money.

It is not uncommon for one person in a couple to have little knowledge of both the day-to-day and long-term finances in the relationship.

This can lead to disaster if the one who does have the knowledge has hidden debts or assets, if the more knowledgeable partner dies or if the two divorces or split up.

You should both be on the same page about spending and saving, and you should both know what assets and debts you have as individuals and as a couple.

This is an ongoing conversation. In fact, it doesn’t hurt to schedule a periodic state-of-the-finances meeting to review where you are financially and where you are headed.

 

Know Good Debt from Bad

There are a few good financial rules that nevertheless have exceptions. One of those rules is to avoid debt. While this is nearly always true, a home mortgage and student loans both represent a type of good debt.

In the case of a mortgage, your home is usually an investment that will appreciate in value. Similarly, the return you get on student loans is a higher income throughout your life.

If you need to take out a student loan for financing your tuition payments or your child needs to do so, your main concern should only be the size of the loan relative to future earnings.

For example, someone who is planning to become a corporate attorney can probably afford a larger student loan debt than someone pursuing a career in education.

Responsible use of credit cards is another money topic that has some nuance. While you shouldn’t allow credit card debt to build up, charging something on your card and paying it off monthly can actually improve your credit score.

What are you doing to avoid these financial pitfalls?