We are living in a now age. The cost of living has increased, but not all employers have taken that into account. Families are making poor financial decisions either to keep up with everyone else or because it’s a necessary need. The following are the top five financial choices which are leading families into debt.
Not Having A Savings Account
Families do not plan ahead. Planning ahead can either be for unexpected expenses such as income loss, illness, rental increases, car repairs, and out-of-town emergencies. You may also need to plan ahead due to expected expenses such as graduations, family vacations, and home improvements. By living paycheck to paycheck, families do not leave themselves a cushion to fall back on. They are not taking advantage of savings plans and CD options their banks have to offer.
Living Off Of Credit Cards
Credit cards can be useful as an emergency backup plan. They can also be useful if they are apart of a rewards program. But the key is to pay the balance off each month. Families are not doing so. Instead they rely on credit cards to purchase things as another form of cash. They are not realizing those little charges add up over time slowing pushing them into a financial hole. So not only do they have the actual purchase amount to pay back, but they have an entire month’s interest charges.
Refinancing And Taking A Loan Out Against Your Mortgage
Many families have taken advantage of refinance options and taking out loans against the equity in their homes. The problem with refinancing is when a family has selected an Adjustable Rate Mortgage (ARM). This type of rate usually starts off at a low fixed interest rate for two or three years, but can increase dramatically over time due to market rates. This will increase the monthly mortgage payments, generally which families can’t afford. Taking out a loan against your mortgage works if you’re paying off other debts and the monthly payments and overall interest can be saved. But some families are falling into this option again and again as they realize its a fast and easy way to have money for other unnecessary expenses.
Taking Out A Loan Against Your 401k
Borrowing from your 401k is a bad financial choice that should only be used for a last resort. One of the reasons its not a good idea is because it reduces your take home pay. People think it’s alright because you’re paying the interest back to yourself, but they don’t look at the administrative fee’s to process the loan request. You are also loosing on potential investment profits once you pull the money out. If you are sick and take a leave from work, you are still required to send in the payment for that loan. And lastly, if you are separated from employment, you’ll have a certain amount of days to place the money back in the 401k plan. Not doing so will result in the balance being considered as taxable income by the IRS and possibly being responsible for early withdrawal fees.
Taking Out Short Term Loans With High Interest Rates
Short term loans are more commonly found in payday loans or title loans. Payday loans are unsecured loans that are expected to be paid back in as little as a week to three months. On the borrowers payday, the lender pulls the funds directly out of their bank account. A title loan is a loan used against the title of your vehicle. The title is used as collateral or security. The problem with these two loans are the extremely high interest rates. There are severe consequences by not paying these loans back such as added late fee’s or possession of your vehicle.