It’s really quite amazing how completely some people are able to destroy their financial lives. Sometimes the tangle of debt and one-sided obligations is so complete that it’s tempting to wonder if it was done deliberately. For a few the destruction is so devastating, all that can be done is to use their story as a cautionary tale for others.
Not counting the leading cause of personal bankruptcies, medical bills, the ways people pilot their financial ship onto the rocks of despair are surprisingly common. It’s not fair or right to blame people for ill health, which is frequently unavoidable, but sometimes medical bills are the last straw on a financial camel that’s already piled high with poor decisions. While one may not be able to control his or her DNA, it is possible to avoid the big mistakes in personal finance.
Co-Signing Loans for Relatives
While it might be an easy call not putting your financial future at risk for crazy Uncle Larry’s latest get-rich-quick scheme, when it’s a student loan for a child or grandchild the decision can be less clear. Parents who can’t afford to put their kids through college sometimes feel responsible, like it’s their fault there isn’t enough money for college. Yet the fact remains that college isn’t for everyone, and co-signing student loans can end up being financial quicksand that destroys two financial lives instead of just one. Major financial decisions that are motivated primarily by guilt are almost always an economic death sentence.
Before co-signing on the dotted line, consider vocational tech, and working through college part-time. The slow road to a degree may take longer, but getting there debt free is worth a couple extra years. Having a skill like HVAC or plumbing, or being an electrician or certified welder is a great fall-back if you ever run into money or employment troubles later in life.
Living on Credit
I remember a couple contemplating a new truck, trying to figure out where they were going to fit in the payment. They finally decided if they levered it in between the boat and 4-wheeler payments, they could just pull it off. If everything you have is financed, if you’re living on credit cards between paychecks and have a mortgage on top of that, you’re already dead financially. All it takes is a job loss, divorce, or serious injury for the whole thing to come crashing down.
No Emergency Savings
According to a 2013 survey by CNNMoney, 76% of Americans are living on a financial knife edge, with inadequate savings to survive a health crisis or other money emergency. Of that number 27%, nearly 1 in 3, have no savings at all. A smart person doesn’t go out on the ocean without a life vest, yet millions brave the rough waters of life with no safety net. Not having emergency savings is pure folly, and a certain path to money misery.
Not Learning to Read Contracts
Reading and negotiating contracts are basic skills in business and life. With courts consistently upholding voluntary entry into contractual obligations, it’s more important than ever to know what you’re signing, and how to make margin notes to clarify responsibilities. Whether that document is a lease, credit card contract, or mortgage document, that legalese has power over your life — and you really need to understand what it all means.
Not Learning How to Negotiate
There is nothing easy or intuitive about learning to negotiate. Few people are adequately prepared for negotiations, and all too often walk into life-altering negotiations cold; it’s a formula for getting crushed. If they do get caught unprepared, they lack the skill to lobby for more time. Good negotiators are part salesperson, part analyst, and part accountant, always prepared with talking points related to value and mutual interest. Good negotiators understand business and speak the language of enterprise.
Not Developing Frugal Habits
Too many people confuse the terms “frugal” and “cheap” when, in reality, they are nothing alike. Frugal people understand that the least expensive item is not always the best deal. Frugal people think long-term and seek the best value for the money they spend, whether the item is a package of socks, a bottle of vintage wine, a mutual fund, or a new car. Take something as simple as granola. Most people would just pick up a box at the grocery store; a careful shopper might take a minute to compare two or three brands, but frugal people know that you can make granola in 30 minutes for less money and with higher quality ingredients than you can buy already made. The term “frugal” is merely a synonym for being wise with your money.
Far too often people end up papering their financial mistakes with money. If you have the money to get away with it, good for you. If you’re not one of the trust fund crowd, then you’ll have to be smarter with your cash.