The celebrated American novelist Ernest Hemingway went bankrupt once during his career. When he was asked how it happened, he said, “Slowly at first, and then quickly.” We all know of other celebrity bankruptcies, and if financial calamity can happen to them, it can certainly happen to us. As a result, we have decided to list the five worst financial blunders a person can make, in the hope that reading about them can help you avoid living through any of them. Here they are.
Student loan debt is the only form of debt in America that cannot be discharged in bankruptcy. While it has been received wisdom that students should try to attend the highest-tier university they can get into, this wisdom needs to be reassessed. College graduates are now carrying over $1 trillion in student loan debt, and for many, the incomes they are receiving are not sufficient to support their loan payments and leave enough money to support the lifestyle they hoped for.
On family finance expert has concluded that unless you are pursuing a career in a field that pays six figures, you shouldn’t acquire more than $30,000 in student loan debt. Solutions include focusing on your grades and SAT scores in order to increase your chances for a scholarship, working part-time, and going to a state university. The alternative might be a heavy load of debt that can follow you around for a lifetime, delaying such life choices as home buying, and even marriage.
While the student loan minefield emerges when we are in our 20s, in our 30s the biggest financial issue will usually revolve around home buying. Most new homeowners don’t realize that the average mortgage only lasts for seven years. We are a fairly mobile society. If your home loses value, and you find yourself underwater, however, that mobility may end in a hurry.
The era of steadily rising home prices is likely at an end for the foreseeable future, and home buyers would do well to return to the tried-and-true method of starting with a starter home, and working their way up to larger and better homes as their incomes rise and their and careers grow.
Many people, once they find a good or at least acceptable job, have a tendency to sit tight and leave any further career examination for their next pink slip. The best time to look for a job is when you have one, not after you’ve lost one. Another way to look at it is – it’s harder to hit a moving target. While you may be comfortable now, by not examining other opportunities, your skill set may narrow, your resume may begin to look a bit dated, and you may simply be earning less, and possibly enjoying less job satisfaction, than you could be. Don’t wait for the next crisis.
Credit cards are properly used to build a credit score, and to secure points, cash back, and rewards benefits, not to actually carry credit, except in rare emergencies. One specialist in this field says that the data clearly shows that credit card debt is the ultimate destroyer of wealth.
Most of us would not accept an interest rate of 15% to 22% a car loan or mortgage, and we shouldn’t be paying off any other debt at such a high rate either. The proper use of credit cards is to build credit history in order to raise your credit scores, and of course to take advantage of those wonderful points, cash back, and rewards benefits that they offer. Actually using credit cards for credit, however, is a big mistake, except in rare emergencies.
This mistake usually occurs later in life, when our young adult children politely ask for our signature as a backstop to their new credit adventures. No one wants to say “no” to their children, but if their income and credit history isn’t strong enough to support the borrowing they have in mind, simply saying “no” may ultimately be the kindest stance to take. If it turns out that your young adult children really weren’t quite ready to support that debt, no one will feel guiltier than they over imposing that burden on you. Better to decline in the beginning, and avoid a worse result later. The lesson may be just what your children need to learn patience, deferred gratification, and financial discipline.
Avoiding these major financial mistakes will allow you to retain thousands, or even tens of thousands, of dollars that would otherwise be lost through the unwise use of credit. Borrowing is a critical tool that can lift up businesses and careers, but only if used carefully and wisely.