Poor Personal Finance Habits that Keep Average Americans in Debt
Americans are in a lot of debt, to the tune of $4 trillion, projected by the end of this year. This consumer debt represents student loans, auto loans, personal loans and credit cards. When you look at the population and this non-mortgage debt, the average American owes more than a quarter of their income to their borrowing. And even more alarming, is the fact that this type of debt has increased more than 38% over the past five years. Bad personal financial habits are contributing to this uptick.
Failing to live on a budget is one of the most common mistakes you can make. But without this essential financial tool, you’ll keep making all the other mistakes that lead down the path to overwhelming debt. A budget is a simple tool that identifies how much money is coming in and what bills and expenses need to be paid so you can determine how much should be going out. A budget also allows you to set up two other tools many consumers are mistakenly ignoring – emergency funds and savings.
Lack of an Emergency Fund
Emergencies happen – it’s inevitable. How you prepare for these emergencies determines the impact an they will have on your finances and your debt. Most Americans don’t have an emergency fund that’s separate from their savings. Rectify that for yourself by building up an emergency fund that’s equal to or greater than three months of living expenses. This monthly amount should include your basics, like rent/mortgage, utilities, food, and transportation expenses.
Making Savings Optional
Many Americans fail to make savings a priority. They pay their bills, pat themselves on the back for taking care of their expenses and then proceed to blow the rest of their income on things they don’t really need. Break the cycle and pay yourself first by depositing a set percentage of your income in a savings account or CD. See how helpful a budget is?
Caviar Habits on a Hotdog Budget
Just because you want something, doesn’t mean you have to have it, and it certainly doesn’t mean you need it. Living within your means is the single best way to stay out of debt. Basically, that means you spend what you earn and not a penny more. Granted, if it were that simple, consumer debt wouldn’t be careening to $4 trillion. But, you can take steps to minimize outlandish spending that doesn’t befit your income. The next bad habit helps address that issue.
Relying Too Heavily on Credit Cards
Credit cards aren’t free money. They’re not a pass to spend what you don’t have in your bank account and they’re not the solution to keeping up with your neighbors and in-laws. Stop using them like they’re a golden ticket. Some people have the discipline to reap rewards in points and cash rebates with smart, responsible use. Others keep an emergency card on hand for unexpected situations where the convenience of a card can be of some help. Keep in mind that an emergency fund is still the best option. If you don’t possess this discipline, pay off your cards and get rid of them.
Debt and the Small Business Owner
Small business owners are average Americans who had the heart, courage and motivation to pursue their dream of entrepreneurship. And for that, you should be commended. But as a small business owner, you’re likely aware of the need for capital to launch, run and grow your business. Excessive debt can sink your chances of obtaining the funding your business requires to succeed.
For sole proprietors, your personal credit plays an integral role in the ability to obtain business credit. Even if you’re paying your bills and doing it on time, a high debt-to-income ratio can ding your FICO score and ruin your chances of getting the credit approval your business needs. To overcome this issue, address any destructive personal financial habits that are driving up your debt and obstructing your ability to attain your goals in the business world.