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(MoneyWatch) ... "Consumers who learn how to avoid common financial missteps will be better prepared and have a much brighter financial future," said David Jones, president, Association of Independent Consumer Credit Counseling Agencies.
What toxic money mistakes do you need to avoid?
Failing to save for the unexpected. Everybody needs an emergency fund, particularly when you're living life on the edge. ... Ideally, you want to have three to six months' worth of living expenses. But if you can't save that much, save what you can. Even a few hundred dollars in the bank can make a difference.
Letting bad habits blow your budget. ...Having a budget doesn't mean that you live a life of deprivation. The real reason you make up a budget is to make sure that you are spending your money on stuff you really want.
Too often, consumers don't write down where they're spending their money, so instead of spending via plan, they spend thousands of dollars on things like coffee, junk food machines and Happy Meals. Seriously, if you want those things, buy them. But do it consciously, knowing how much you're spending, rather than letting your bad habits take over.
Sure, creating a budget is a little bit of work. You'll need to go through a year's worth of bank statements and credit card bills and figure out what you're spending on everything from utilities to shoes. If you do that and find there's a black hole between what it seems like you're spending and what you have left at the end of each month, stick a notebook in your glove compartment or purse and start writing down where you're spending your cash. You might be surprised and horrified by how bad habits are gobbling up your money.
Borrowing to buy. ... Borrowing to buy things, particularly at credit card interest rates, is a great way to make yourself feel poor because you never finish paying for last year's luxuries. If you're in debt now, make a plan to pay it off. If you're tempted to buy something on "sale" that you can't afford to pay for with cash, mentally boost the "sale" price by the credit card interest rate you'll be paying over the next year. ...
Paying debt with debt. Debt consolidation and payday lenders lure people in with promises that they can solve all your financial woes with yet another loan. ... What they don't say is that paying off credit card debt with a consolidation loan or meeting an unexpected expense with a payday loan does not make the debt or the expense go away. In fact, it's a really expensive short-term fix that can make meeting your next obligation all the more difficult.
Bouncing payments. It doesn't matter whether you use a debit card or write checks - if you bounce a few payments, you're going to pay dearly. The average overdraft fee costs you $35. And since banks still sometimes "reorder" checks, one bounced payment can create a bunch of overdraft fees. Bankers have been encouraging people to "opt in" to expensive overdraft protection plans that allow you to buy things even when you don't have the money in your account to pay for it. ... Want a far more cost effective option? Hide $20 in your car for the rare "out of cash and gas at the same time" moment and drop the overdraft protection. Then let your bank "decline" your debit transaction when you're about to overdraw your account to buy a cup of coffee. That latte wasn't worth $40 anyway.
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Kathy Kristof
Kathy Kristof is an award-winning financial journalist and the author of Investing 101.
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