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The scariest things people do with their money

Venturing out on your own is an exciting step in life, but there are scary pitfalls ahead if you don't prepare for the financial responsibilities.
Venturing out on your own is an exciting step in life, but there are scary pitfalls ahead if you don't prepare for the financial responsibilities.

Q: I’m leaving home for the first time after I get my diploma in December. A good friend and I have rented a place and she’s also moving out for the first time. As we were talking about how to split our living costs, we started thinking about all of our other expenses and bills too. Neither of us has parents with a lot of money and we’ve both had to learn a lot on our own. My older brother got into a lot of debt after he moved out and I’m really afraid of ending up like him. Sharing living costs with my friend will help, but what else should I not do with my money? ~Erin

A: Moving out on your own is a big step, but figuring out how to manage your money and financial affairs is an equally big step. The habits you develop now will likely stick with you for the rest of your adult life and your choices will shape the next decade or more. As you saw with your brother, being in debt is hard. Being financially disciplined is also hard, but in a different way. I would encourage you to choose your direction based on where you’d like to see yourself in five or 10 years, and then take steps to get there.

Making decisions based on your fears rather than your choices can lead to some frightening results. Some of the more common ones are relying on payday loans to get by, gambling away rent or mortgage money, only ever making minimum payments on your credit cards, not saving for emergencies, or taking on a car loan you know you can’t afford. But there are other scary things people do with their money, which are less common, but that can also add up to big debt. Here are six of them and tricks for what to do instead:

1. Paying late fees – on everything

Avoid the dreaded late payment fees and penalties by using a paycheque plan to ensure that you make all of your payments on time. Late payments on credit cards mean your interest rate will increase by as much as five per cent, and not come down again until you’ve made your payments on time for an entire year. If you carry a balance on your credit card, the interest increase alone can be enough to topple your budget. Avoid being a zombie when it comes to paying on time. Use calendar or app reminders, stickers on your wall calendar, or automatic withdrawals from your bank account to ensure that payments aren’t late.

How Much Do Late Payments Affect Your Credit Score?

2. Failing to rein in bank account and overdraft fees

Paying a minimal amount or a reasonable flat fee to do your banking might make sense. But paying for more than you need, or being charged for overdrawing your account, even if it’s the monthly fees that take your balance below zero, can add up to a lot of needlessly spent money over the course of a year.

Review your bank account statement each month and find ways to keep your costs down. If you’re disciplined, it can help to pay more often with a credit card if your number of debit transactions is high. If you tend to overspend with credit, withdraw a lump sum of cash, organize it with envelopes to stop yourself from spending it faster than you intend, and keep it in a safe place so that you have it when you need it.

Also watch inter-bank ATM and cash machine fees, which can add up fast. If you’re out and really need some cash, you can often avoid these fees by making a small purchase with your debit card and asking for cash back as part of the same transaction. Each store has a limit on how much cash they’ll give you and transactions can usually be as small as a pack of gum.

How to Get Out of Overdraft Once and For All

3. Following financial advice from friends

Unless your friends have the expertise and credentials to advise you about your finances, don’t take their advice about your money without first fact-checking what they suggest. From the best way to pay off debt to the investment you just have to make, there’s no secret spell that shines a light on frauds and scams. Verify what your friend is suggesting with someone qualified to give you guidance so that you can make an informed decision. People who are qualified have credentials that can be verified independently from their place of employment. The consumer protection authority in your province is a good place to start to find out more.

Four Examples of Bad Personal Financial Advice

4. Signing up for buy now, pay later plans

This is one instance where it’s worth scaring yourself straight back to your budget. Buy now, pay later plans can end up feeling like a curse because it feels like you’re always paying for what you bought in the past. Over the years, retailers have expanded the buy now, pain later plans to make them more enticing.

It used to be just the store-branded credit card that allowed you to buy home furnishings, for instance, with only a minimal initial payment and no interest until the end of the promotional period. Some merchants now allow purchases to be split into a series of four or six equal payments to bring the initial cost down. No interest is charged unless you default on one of the payments. And then for bigger purchases, like a vehicle, your first few payments might be waived.

How New Car Offers Could Cost You More

But the devil is in the details. “No payments” is often just another way to say that the payments will be tacked on elsewhere and the interest will still accrue. Look at your cost-of-borrowing document carefully if you’re thinking about a buy now, pay later plan — then budget carefully to take maximum advantage of an interest- or payment-free period.

Protect Yourself From Rising Interest Rates

5. Making early withdrawals from retirement savings

Retirement savings are meant for retirement. Unless you have no other means whatsoever to earn money or make ends meet, you don’t want to touch these until you retire. Making withdrawals from an RRSP, for example, triggers tax consequences. This could leave you paying more income tax or qualifying for less income-tested government support. Drawing on CPP or a work pension before you’re 65, while you’ve still got the capacity to work, will force you to stick with lower payments when you’re older and less able to keep earning some income.

It’s always harder to save than it is to spend. Rather than robbing yourself of your future financial stability, look for ways to cut costs now to create a little breathing room in your budget.

6. Financing a big purchase without test-driving the payments first

If you think you can afford a big payment added to your budget, spend the next three to six months making that big payment into a separate bank account. This will help you see if you really are prepared to make the lifestyle choices that go along with the big payment. For example, if you plan to trade in your car for a newer model and your payment will go up by $400 a month, set that extra $400 aside for a few months to see if the newer model is really worth it.

There’s no trick to this kind of a test drive. You’ll either learn a lot about how you manage money and the spending choices you make, or you’ll end up with a treat — some extra money in your savings account to put towards a down payment or other expense.

The Smartest Things to Do for Your Finances

The bottom line on the scary things we do with our money

When it comes to the scary things we do with our money, wasting it tops the list. That’s because wasting money goes beyond spending the cash. It also means wasting the time and energy it takes to earn the money. Considering what you buy in terms of how many hours you spend working to earn that cash will help you turn around costly money habits and give you more time to scare up fun with friends and family . Then blow the cobwebs out of your savings account and budget your life, not just your money.

Related reading:

Are Your Debts Haunting You?

Scary Good Money Management Ideas

Tricks for a Memorable Not Expensive Halloween

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check nomoredebts.org or call 1-888-527-8999.

Copyright Postmedia Network Inc., 2020

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1 being least likely, and 10 being most likely

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