The people who set those traps are counting on you falling into them, as many before you have.
What are the traps? Mostly short term reward for long term pain.
- When I was in college, there were people on campus who got paid $10-15 per credit card application they could get students to fill out. They would set up tables with candy bars and cans of soda on them. “Free candy bar and soda! Just fill out a credit card app.” I had friends that got their “Free candy bar” and racked up $2,000 in debt with 28% interest the following month. Don’t do it.
- Banks. Their entire existence is to entrap you in debt. Sometimes you need it. You need it when you need a car. You need it when it’s time to buy a house. You should avoid loans for anything else if possible.
- Overdraft fees. This is mostly checks that people don’t use much, but if you overdraft your checking account when paying bills, they will screw you over immensely. Watch you money, don’t overspend.
- Payday loans and title loans. It’s predatory lending designed to suck away your life. Don’t do it unless you have to pay for healthcare or will be otherwise homeless.
- Credit cards. Get one, pay it off EVERY MONTH ON TIME. Late fees are crazy expensive, interest even more so. Never carry a balance. If you can’t pay it off every month, don’t use it. You’ll need it to build credit – demonstrate your ability to pay back loans on time. You need good credit to rent an apartment, to buy a car, to buy a house, or to get education loans.
- Pay your taxes. The IRS will screw you over if you don’t. If you can’t pay your taxes, FILE YOUR TAXES AND ASK FOR A PAYMENT PLAN. Do not choose not to file simply because you cannot pay.
- Don’t borrow money from friends or family. If you are unable to pay them back, you will cause problems in your relationships with them. People get weird when they don’t get paid back. It gives them a reason to focus on the things they don’t like about you, and it helps those things look 10x worse than they ever have. If you must, only do it if you absolutely know you can pay them back in the very short term.
- Help your friends, but rarely will money fix their problems. They may have a bill due, but you giving them money for that doesn’t fix why they don’t have money to pay their bills. Their money problem is not that they don’t have $50 to pay their phone bill, it’s that they don’t know how to manage their money and make the decisions it takes to not overspend. You giving them $50 isn’t going to fix that problem. They don’t have money to pay their bills because they overspend and do not watch their money. If you chip in, you aren’t watching yours and may get yourself into a similar situation.
- Never lend money to your friends or family because of #7. If you feel the need to “help” them, make it a gift. Gifts don’t have to be repaid. There will not be this thing lingering over your relationship while they figure out how to juggle everything to get you paid. Your friend will likely feel sheepish asking you for money again, so hopefully they won’t. If they ask again, just tell them you can’t afford it right now, they should understand what that means given their situation.
Those are the traps to avoid. What should you do?
- Pay your bills in full. If you ever can’t, contact who you owe money and talk to them. They don’t like it when you can’t pay on time, but they love to talk to you about it. Talking to them tells them that you aren’t going to run away and hide and never pay. They hate it when you refuse to talk to them. When you don’t pay, they report it on your credit report, and your credit score goes down.
- Don’t overspend. Get the minimum and always ask for the best discount available. Get the small one (cable plan, cheeseburger, car), and try to make it work. If you realize it doesn’t work, fix it. Don’t just jump to the big plan / vehicle / meal without seeing if the small one is good enough. It usually is.
- Spend less than you make. Repeat. This is how you become financially successful in life, by always spending less than you have.
- Forget what your friends have. Don’t focus on what you don’t have. Take care of what you do have. A lot of marketing exists to make you feel bad about yourself, your possessions and your experiences. Advertisers try to create an emotional hole in you so you can empty your wallet and fill that hole with their product or service. They use envy against you. Their products and services will not fulfill your life. You may enjoy those things, but the feeling rarely lasts as long as the debt you will carry to pay for them.
- Use a credit union. Banks have shareholders that want to get paid some profit every month. Banks make that profit off of their customers. Banks exist to make money off of their customer and give it to their shareholders. Credit unions are different. Credit unions exist to serve the needs of their members. They do not have shareholders looking for checks every month. Credit unions are not there to generate profit, they are there to pay their own bills and provide service to their members. Their motives are pure, but not every credit union will have the best deals or service, but they are not out to screw you over at every opportunity.
- Get a car, always buy used, 2-4 years old if you can. Get a loan you can pay off in 3 years, 4 MAX. If you need a loan to last longer than that, you are buying too much car. 72-84 month loans are becoming popular. The people who get these are fools. Make your goal to buy the car, take care of the car (maintenance!), and keep it after you’ve paid it off. Set a reminder to pay your car loan every month. When the car is paid off, change that reminder to “Not paying my car payment today!” Reward yourself with the feeling that you are not making a car payment.
- Find a way to save money, 10% of what you earn if not more. To start, use it to build an emergency fund. Get $1,000 set aside, so if you ever have an emergency, you can borrow from your fund before you start asking banks or friends for money. Once you get that $1,000, start doubling it. Then set up “buckets of money” on paper, $500 towards your next car down payment, $200 aside for Christmas gifts in a few months, start anticipating your needs and don’t touch that money for anything else if possible.
- Be diligent when you pay bills, especially with autopay. Read the charges. Cable companies, phone companies and others want to get you on autopay, which is often a good choice, but bad businesses out there will start to add things / raise prices in hopes that you simply don’t look at your bill anymore. Autopay makes a lot of people lazy, and they count on this to add to their profits. Cable companies are the worst.