Seven Mistakes To Avoid If You Are Having Money Problems

You situation is unique, but your circumstances probably are not. During COVID-19 many people are dealing with reduced income or job loss, medical debt, too much much consumer debt, and crushing student loans. This affects millions of Americans each year, before you add in the Pandemic. Right now 78% of American families live pay check to paycheck. With unemployment at record numbers here are some tips to help you weather the storm and some mistakes to avoid.

Mistake 1. Not prioritizing your four walls

Money difficulties are frustrating and scary! But giving money to a creditor who has been calling and neglecting the electric bill or mortgage will make matters worse. Always take care of your “four walls” first.

1. Food for the Family
2. Utilities: Gas, water, and electric
3. Rent or Mortgage Payment
4. Transportation

It may be tempting to protect the FICO by making the Visa payment – but it will add even more stress if the water gets shut off or you get an eviction notice. I know, I know, the “late fees,” but those are minimal compared to utility reconnect fees or getting behind on car payments.

Mistake 2. Ignoring bills

Open it, DO NOT ignore the letter. It is astounding the number of people who throw their bills in a drawer or even in the trash. Due to feeling fear and stress when they open the bill. If you know you have the four walls protected and this bill won’t be paid try this. A better strategy is to get ahead of the problem by calling the creditor and explaining the situation. Ask them to give you an extension, not charge interest, and document that you are making an effort.

Mistake 3. Using Payday Loans

Payday lenders can give you “quick cash” immediately, paying a substantial fee, about $15-20 on every $100 borrowed. You promise to pay the balance in full on your next payday. They require either electronic access to your bank or writing a postdated check. Most loans are not paid off in the next payday cycle however, because something else happens. The lenders expect that, and then offer to “renew” your loan and charge another fee. In fact, this short-term access to cash has an average annual interest rate of 391% to 521%. The cycle of paying it off. Then borrowing again over and over is a main reason to stay away from these places. It is almost impossible to get out without paying the entire balance in full before the next withdrawal occurs.

Mistake 4. Withdrawing funds or loans from retirement accounts

Despite the relief plan this should be avoided at all costs. It is so tempting to tap into the 401 k or other retirement account. After all you are just” borrowing from yourself” to pay off debts or improve cash flow. There are interest payments that must be made on “your own” money. If you are unable to repay the loan, you will be hit with both a 10% penalty and subject to taxes. Additionally, this could potentially chain you to your current job.

Also, while your money is out of the market you are doing two things. One pulling it at the low points and two missing the compounding growth over time. Unless you are facing bankruptcy this is not a recommended solution.

A better strategy is to stop all contribution to retirement, temporarily, and get back on track financially. The “employer match” may add to your balance, but it will not put needed cash into the budget. Stopping the automatic deposits now, even for a few months, will give you more cash in your paycheck each payday.

Mistake 6. Consolidating Debt to lower payments.

Refinancing your car, taking a home equity loan, or consolidating through a company to lower your payments sounds like a reasonable step. Especially while you feel like you are drowning. Refinancing the loan balance on your car stretches out the length of the loan. This will actually add more interest and a more expensive loan in the long run. Let’s say you owe two more years on your car. If you refinance and lower the payment you will now pay for four years doubling you loan term. This may put you at more risk of being “upside down” in the car (owing more than it is worth) making it hard to sell later.

Home equity loans were really popular before the meltdown in 2008. Many banks allowed borrowers to take out equity to 100% of the value of the home. Then the values dropped, and people were holding the primary mortgage AND the equity line. This caused them to be “upside down owing more than the home is worth. This locks people into being unable to sell their homes. Perhaps even prevents the borrower from moving to take a better job. Tapping all of that equity in your home to pay down the other debt is a huge risk. You risk changes in the market as well as putting another lien on the house. Also, you do not want to trade unsecured consumer debt for your house. This is a terrible idea.

Consolidating through a non-profit company may lower your payments. Initially they negotiate a longer term of the loan, and may lower interest, because of the bargaining power of the organization. But the truth is these companies charge fees, typically by the month, or for every account included. This not only destroys your credit. This is also a bad practice if you have not learned to take control of your spending. Most people find themselves right back were they started.

The Best Thing To Do

The best thing to do is to create a debt snowball where you put your debt smallest to largest and then attack it with “gazelle” intensity.

https://www.daveramsey.com/blog/get-out-of-debt-with-the-debt-snowball-plan?utm_source=bing&utm_medium=cpc&utm_campaign=FPU%20-%20Non%20Brand&utm_content=Get%20Out%20Of%20Debt&utm_term=how%20to%20get%20out%20of%20debt&utm_id=bi_cmp-291378453_adg-1268836517950680_ad-79302379646076_kwd-79302600468284:loc-190_dev-c_ext-_prd-&msclkid=5a0001cfa40f1a66f5915f0e2096286d

Mistake 7 Not getting legal or coaching help, due to the belief that it is too expensive.

Many states have legal aid societies and clinics that can help consumers with collection violations, lawsuits from creditors, and other consumer law topics.

Financial coaches are professionals. They can assist with budgeting, advice on how to get out of debt. They usually have a network and can even refer you for specialized assistance if it is needed. Such as an IRS professional or consumer law attorney. Importantly, coaches can help you make long term changes in money habits. Changes that can help you prevent financial troubles in the future. Coaches will get you back on track for the legacy you want to leave to your family.