There are pivotal points in our life where we come to a crossroads. Sometimes it’s a big decision we need to make that will greatly affect our future. Other times, the decision is made for us, as in the case of a divorce or the death of a loved one.
Regardless, it’s easy to get swept away by the emotions of a major life transition and make significant financial mistakes. Whether you’re graduating from college, starting a new job, moving to a new city, or dealing with something else, be sure to avoid making these major, but not altogether uncommon, financial mistakes.
Keep reading to find out more.
Buying a Brand New Car
There are some positive life transition scenarios where it may seem fitting to reward yourself: graduating from college, getting a new job, or finally getting that big promotion. And you’re right, you should reward yourself.
However, be careful here. Rewarding yourself with a brand new expensive car could be a huge financial mistake with the potential to haunt you for years to come. Did you know the average new car payment is $554 a month?
You’ll be paying a large amount each month just for loan interest, and if you ever want to get out from under the car, you’ll rarely be able to sell it for what it’s worth. You’ll likely lose thousands of dollars in the deal.
Draining Your Savings Account
There’s a big difference between an emergency fund and a savings account. While an emergency fund exists to serve you in the event of surprise events like unexpected vehicle expenses, house repairs, vet bills, etc., a savings account should remain relatively untouched.
However, when going through a major life transition, people often drain their savings accounts in order to make things happen quickly. People going through a divorce, for example, are often tempted to use their savings to establish a new life for themselves. While understandable, it’s wiser to keep the money in a savings account and rebuild their new life slowly.
Pulling Money Out of Your Roth IRA
Perhaps even worse than withdrawing money from a savings account, however, is an early withdrawal from an investment account, such as a Roth IRA or 401(k). Not only will you be penalized on your income taxes, but you’ll also devastate the foundation of that investment and lower the power of its compounding interest.
Buying a House You Can’t Afford
Some major life transitions call for new living arrangements. However, remember to shop conservatively for your new home. Just because you can afford a $350,000 mortgage doesn’t mean that should be your goal. The same goes for renting a home.
Don’t max out your real estate budget. Instead, invest in a home you can easily afford which will grant you plenty of buffer room in your budget in case you encounter hard times. This also allows you to increase your budget for savings and other investments.
Maxing Out Credit Cards
Life has a way of turning our world upside-down sometimes. While this may leave you scrambling for a new home, a new car, or a new job, you must be careful about how you handle your finances during these transition periods.
Avoid maxing out your credit cards to get your life back on track. It may sound like a quick fix, but it will leave you with long-term problems. The average American household has over $16,000 in credit card debt, which can take years, if not decades, to pay off.
Taking Out a Second Mortgage on Your Home
Another common financial mistake people make in times of transition or crisis is taking out a second mortgage on their home. In this case, you’re borrowing money from the bank by placing a lien against your home. Should you fail to make payments in the future, your home is vulnerable to being taken by the bank.
This also accrues more debt, and if you’re already struggling with a large amount of debt, biting off more is not the best solution.
Not Holding Yourself Accountable to a Budget
Whether your life transition is positive or negative, you may be tempted to throw caution to the wind and simply live in the moment, financially speaking. Don’t allow whatever you’re going through to contradict common financial sense or fall under the mindset of “I’ll deal with it later.”
Financial problems are like viruses. They never stay stagnant. You either actively fight them off, or they grow and take over your entire life.
Create a budget for yourself and follow these seven ways to improve your financial health.
Living At or Above Your Means
No matter where you are in life, you should never be living at or above your means. Did you know that 78 percent of Americans live paycheck to paycheck? That means the majority are one missed paycheck away from significant financial problems.
This happens because no matter how much money we make, people have a tendency to grow into their incomes. Instead, practice some discipline and make sure you’re living below your means. Try to ensure you have at least a few hundred dollars left at the end of each month that can go into savings, an emergency fund, or investments.
Not Asking for Help
Pride goeth before a fall, and while many try to carve their own way even in times of struggle, don’t let your pride prevent you from seeking help when you need it.
If you have friends or family members who can help you, ask them for assistance. While money can sometimes interfere in personal relationships, the people who care about you would likely rather donate or lend some money to you than see you suffer.
However, you owe it to them to be as responsible as possible with your finances moving forward and to pay them back. Show them you’re not squandering their or your own money.
Not Putting Money Toward Your Future
Sometimes, a major life transition can be prolonged or painfully dragged out, such as a messy divorce or the illness and subsequent passing of a loved one.
During long transitions in your life, don’t forgo putting money toward your future in savings and investments. While it may seem easier to think, “I’ll start when all of this is over,” it rarely happens that way.
Remember, every day comes with another “tomorrow” in which you can promise to start doing whatever it is you’re putting off today. Just do it now.
Going Through a Major Life Transition?
It’s easy to sit back and advise others how to make good financial decisions. We’re not in your shoes. However, we do our best to understand what you’re going through.
Everyone encounters at least one major life transition that threatens to destroy everything they’ve worked for. And sometimes, it does. But that doesn’t mean you can’t keep moving forward.
Whatever your story, we can help you get your finances back on track. Contact us today to schedule a free consultation.