The 6 Worst Financial Mistakes That Can Lead to Debt

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I think we can all say we’ve made some dumb financial mistakes here and there, and hopefully, they haven’t accumulated too much debt.

But, if you’re like us, these money blunders turned into an overwhelming amount of consumer debt that led to living paycheck to paycheck and a ton of financial stress.

These financial mistakes may have seemed like small potatoes at the time, but down the road led to an accumulating mountain of debt that felt impossible to pay off.

The sad thing is I know we are not the only ones that have made bad choices with our money. Here are the worst financial mistakes people make that can lead to crippling debt.

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1. Not having a budget

Not having a budget is the biggest and most common of the financial mistakes people make.

It doesn’t matter how much money you make; everyone should have a plan for their money. A budget is your plan to reach your financial goals.

Chances are, if your not on a budget, you’re making frivolous purchases and overspending unnecessarily. Maybe even living paycheck to paycheck (when you don’t need to be) because of your non-budgeting lifestyle.

By starting a budget, you learn to spend money more intentionally because you have a plan for your money and goals you want to achieve. It will actually feel like you got a raise when you do start budgeting!

financial mistakes

2. Spending money you don’t have

Nowadays, most people are “trying to keep up with the Joneses” by spending money they don’t have. This kind of competitiveness leads to always wanting more, which means more debt.

When you take out loans or use credit cards, you are borrowing from your future income. Meaning you will have less money in the future because you’re paying for your past mistakes.

Like Dave Ramsey says, “We buy things we don’t need, with money we don’t have, to impress people we don’t like.” It’s crazy how we get so wrapped up in impressing people; we are willing to go into debt for it.

“We buy things we don’t need, with money we don’t have, to impress people we don’t like.”

-Dave Ramsey

3. Buying a house you can’t afford

The term house poor is used when somebody spends an excessive amount of their total income on owning a home (mortgage, taxes, maintenance, etc.). According to an article by NBC News, an overwhelming 38 million Americans are house poor.

Some people end up house poor when there is a sudden decrease in their income, such as a job loss. Other times, it’s an issue of buying a home they can’t afford.

Most financial experts would caution you not to spend more than 28-30% of your income on housing. I tend to side with Dave Ramsey, who conservatively recommends not spending more than 25% of your take-home pay.

4. Buying new cars

When purchasing a car, most people think buying a new is the only way to get a safe and reliable vehicle. Not, to mention the financing incentives are usually better. 

But did you know that a new car loses value the minute you drive it off the lot? According to carfax.com, that new car will lose about 50% of its value in the first 4 years.

“The value of a new vehicle can drop more than 20 percent after the first 12 months of ownership. Then, for the next four years, you can expect your car to lose roughly 10 percent of its value annually.”

-carfax.com

Therefore, you’ll not only get more bang for your buck with a used car, but you’ll also save money when it comes to insurance costs and depreciation.

With a bit of research, you could find a used car that meets the needs of your family without the hefty price tag that is just as safe and reliable.

5. No emergency fund

An emergency fund is essential if you want to avoid getting into debt or going further into debt. When you don’t have money set aside for life’s unexpected events, you’re forced to depend on credit cards to get you out of the sticky situation.

When you use a credit card for emergencies, not only are you stealing from your future, but you’re paying interest on it as well.

You should have a 3-6 month emergency fund to cover emergencies or in the event of a job loss. This will keep you from taking out enormous debt that is impossible to pay back.

financial mistakes

6. Not Paying off Debt

Not paying off debt leads to more debt. When you carry a balance on a credit card, all it takes is one pricey mishap to turn into a devastating situation.

I recommend that if you don’t have the money to pay cash than you don’t need it. But, if you’re going to use a credit card, do so responsibly and pay them off at the end of every month.

Start paying down your debt as quickly as you can using the snowball method. Pay off the smallest debt first and then move on down the list of debts-smallest to largest.

Conclusion

Debt can be overwhelming and feel downright paralyzing. Being intentional with your money can help keep you out of debt or from going deeper into debt.

By creating a monthly budget, saving for emergencies, and living frugally, you’ll be able to live within your means and avoid these common financial mistakes.

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