Money is tight for many households these days, and many are searching for ways to give themselves a little more breathing room in terms of finances. While many are opting to be one car households or forgoing expensive habits like eating out, others often seek band-aid solutions that offer quick fixes for financial woes – some of which often hide under the facade of being long-term solutions.
So if you are currently trying to find a way to give yourself a little more room in your budget at the end of the month, make sure that you avoid the following 7 deadly money traps at all costs to keep your financial situation from getting any worse:
The Mortgage Refinance
There are few situations in which using a mortgage refinance is actually beneficial to the mortgage holder. The rate being offered need to be at least one percent lower than your current mortgage. Otherwise, you will most likely lose all savings on interest to the high closing costs you will be required to pay at the time of signing.
Another unforeseen money pitfall of the refinance is the interest paid on interest. When you refinance, the whole loan, including the interest accrued, is placed under the new rate. So essentially you will wind up paying interest on interest – a money waste, especially for those who have been in their homes longer and have therefore accrued more interest.
The Title Loan
The title loan is perhaps one of the worst money traps a person can use. Often, emergency expenses prompt people to look for large sums of money frantically, and many make bad choices because of it. The worst offender is often the title loan. These loans are given based on how much your car is worth, and requires you to sign over your car title in case you aren’t able to pay it back. They come with incredibly high interest rates – often 400 to 900 percent, and can quickly make a person dependent on them because of the high amount owed.
Those who use these loans suffering from money problems, often can’t repay on time because of the added amount provided by the interest rates, and are required to take it out for another term, making their total balance even higher.
The Payday Loan
Similar to a title loan, payday loans also have incredibly high interest rates and can quickly make a person dependent as they can often seem impossible to pay off on time. The difference between these types of loans and title loans is that they can only be pulled out in smaller amounts and are advancement on your paycheck.
While this may seem like it makes the payday loan the better option if having to choose between it and title loan, these reasons hardly constitute a good reason to ever use a payday loan. The interest rates are just too high to make them feasible or beneficial.
The Home Equity Loan
While a home equity loan can seem like a great way to pay for any updates your home may need, more and more households are choosing to take out these types of loans to afford college tuition or frivolous expenses, such as new cars or trips. A home equity loan should never be pulled out for any reason, with the exception of home updates – and only then it should be pulled out if you will make the money back upon sale. Otherwise, avoid this type of loan – it will only provide you with two high payments for your home at the end of each month, instead of just one.
The Credit Consolidation Program
For many with numerous credit card bills at the end of each month, entering a credit consolidation program seems like a great way to save money on those bills. However, these programs are rarely beneficial, and often wind up costing the customer more money because they either don’t fulfill their job or charge for additional and often hidden service fees.
Buying Over Renting
Many people convince themselves that owning a home is cheaper than renting, and that buying a home, especially when home prices are low, is a great way to save money. This is usually not the case. While a home may come with a mortgage lower than a rental property, it also comes with homeowners insurance, private mortgage insurance, and general maintenance and repair which can total more than what you pay in rent a month.
While owning a home can definitely provide future financial benefits, purchasing a home under the allusion that it will save you money now is a horrible idea and will generally leave you in worse financial condition than before.
The 401(k) Loan
Your 401(k) is one of the most important savings accounts that you will have. You need money for retirement, and not having enough in that account could mean making yourself a financial burden to those around you. Because money is tight, many people are opting to pull out 401(k) loans. Not only do such loans result in penalties or taxation from time to time, but they often leave outstanding balances on accounts from which they were withdrawn.
Trying to find ways to give yourself more money at the end of each month is never an easy task. There is no quick or easy fix and it usually requires you to take a good hard look at your spending habits. If you truly need more money at the end of each month consider taking on a second job or giving up a few of your more frivolous expenditures instead of opting for a quick fix. These quick solutions will only be likely to hurt you in the end, and will just put you in an even tighter spot with that monthly budget.