Home > Personal Finance > 6 Common Money Traps That Are Draining Your Wallet

Comments 0 Comments

Sometimes, when I look back on the way I handled money in my 20s, I want to smack myself. During that time, I built up a lot of debt — so much it led me to declare bankruptcy. My poor money management almost ruined my life.

When I really think about my attitudes toward money in my 20s versus my 30s and now my 40s, they are so different. My 20s were about spending, my 30s were focused on building up my finances and now in my 40s I’m busy enjoying them. As I look back, I noticed that I fell into some pretty common money traps.

Perhaps you, too, have fallen victim to one of these money traps. Here, I’ll share the most common ones to avoid before it’s too late.

1. Instant Gratification

We often decide we want things because they work in the moment. Look at dinner out. If you don’t feel like cooking, you go out to dinner. But the convenience of letting someone else cook for you is a trap.

To learn your own money traps, you need to create a spending plan. A spending plan can help you identify where you every cent of your money is going. Once you’ve learned how you spend, you can better determine what to cut back. (Here are 50 things to stop wasting your money on.)

2. Not Having (Or Ignoring) Your Budget

Some buy into the myth that if you have a budget, you won’t get to spend your money as you’d like. Don’t fall for this trap. Your budget is your money road map, and you get to plan your route every payday. That means you can determine the exits and detours your money will take. If you want to go out to dinner this week, no problem — just include it in your budget.

However, a budget is never “one and done” — it should be evaluated every month. The reason to look at your budget is that your spending and circumstances may change. Perhaps the cost of food went up or you received a raise. That will affect how well your budget is working.

Once a month, try to set aside time to go through your budget and make sure it still works. Update the bills and your income as needed. Make sure you still account for every single penny. If your salary has gone up, now is the time to increase your debt payments or your savings account. (Here are some quick ways to boost your emergency cash cushion.)

3. Falling for Sales Gimmicks

You see something on sale and feel you should get it. After all, it’s on sale, so you’ll be saving money. Right?

Not so fast. When you purchase something simply because it’s on sale, you’re often spending money you would not have otherwise. Before you buy the item, ask yourself if it’s something you’ll need in the next three to four weeks. If not, it might be best to pass.

While you’re at it, avoid store sales tactics such as two-for-one offers, purchase limits and quantity discounts, which encourage you to spend more.

4. You Love the Word Free

Free is one of those words that many find hard to ignore. It makes you feel as if you are getting something special. However, free does not always mean free.

For example, stores often offer free financing offers. These are tempting because you can either make no payments on your new furniture for six months or get your new television set interest-free for 12 months. The truth is, for most, that “free” period will cost more than they realize. Let’s look at both scenarios.

If you purchase something with no payments for any period, you can make the purchase and not have to worry about your budget. But what you may not realize is that you will still accrue interest on that outstanding balance.

Let’s say your loan is $500 and the interest rate is 18%. The store offers no payments for a year. Each month, you will add at least $7 to your outstanding balance. That means your $500 item will now cost you nearly $600. Not such a good deal, is it?

The same is true with 0% financing. Even though you pay no interest, your interest will still accumulate. So, if you have a 0% interest rate for 24 months, you better make sure to pay it in full before the end of the term. Otherwise, the store may revert back to the original balance and calculate your interest based on the outstanding balance, which can make the loan cost even more.

Before you make any large purchase, make sure you can really afford it. A deal is only a deal if it doesn’t cost you more than the ticket price.

5. You Can’t Walk Away

Sometimes it’s best to give up. If you have a vehicle costing you money in repairs every month or two, it might be more cost effective to get rid of it and put that money toward something newer and more reliable.

It might also be the right time to upgrade (or even downsize) your home. If you have added two kids to the family and now live on top of one another, is it worth trying to find ways to add more space? Are you paying to rent a storage unit because you can’t fit everything into your home? It might be better to move or even sell items you can’t use.

You might be trying to keep up with your friends and family. As much fun as it is to take vacations, go shopping every weekend and have the latest electronic gadgets, it may not be feasible, given your budget. Your envy could be forcing you into debt. (Debt can also be rough on your credit. You can see how by viewing two of your credit scores for free on Credit.com.)

Changing your lifestyle is not easy. However, it is a change you must make to get out from spending more than you should.

6. You Don’t Track Your Purchases

When I ask people why they don’t use cash, they usually say it’s because it’s too easy to spend. But the real reason is because they’re probably not tracking their spending. They don’t see where their money goes, so they spend without thinking about it.

Look at the $1 to $5 purchases you make. They don’t seem like much in the moment. But what if you make seven $3 purchases a week? That’s $21. And it’s not just $21, but $21 for which you can’t account.

When you start to keep track of every penny you spend, you force yourself to be more accountable. You become more aware of where you spend and how you spend it. Once you do that, you’ll begin to think twice before buying a second latte.

Money traps don’t have to trip you up while you’re working to achieve your financial goals. Recognize them and do what you can to avoid falling for them.

Image: shapecharge

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team