Common Money Traps and How to Avoid Them

Even the best financial plans can be derailed by common pitfalls. Recognizing and avoiding these can keep you on track toward your financial goals. In this blog, we'll explore some of the most frequent money traps people make and provide strategies to avoid them. Did you know that the average American in February 2024 only saved 3.6% of their disposable income? This is according to the Saint Louis Federal Reserve. If you have been following this blog series you know that percentage is considerably lower than the average recommended monthly savings. Many of us are just one money trap away from not being able to save ourselves from a Money emergency.

I know that times are difficult right now and we are seeing more money go out the door for our basic needs such as higher mortgage payments due to high interest rates, higher food and goods costs, and childcare costs. So this is also the time to start identifying financial traps you have ended up in and become vigilant about ways to avoid them so you don’t end up in Financial Stress.  

We will look at some of the common Money Traps like Impulse buying, Credit card misuse, delayed retirement savings, and adequate insurance coverage along with other pitfalls in this discussion. My hope for you is that you walk away from reading this with a plan to avoid traps and take action on the ones you are currently struggling with.

Money Traps to avoid

Impulse Buying:

I am sure that we have all caught ourselves in this trap at least once recently. Impulse buying occurs when you make unplanned purchases without considering the long-term impact on your budget. These decisions are often driven by emotions such as stress, excitement, or boredom. I was at a store the other day picking up a gift for a child’s birthday party. I for sure had a few impulse buys in my cart. A cute porcelain Flamingo and cactus to decorate a shelf with, they were just $3 each. However, by the time I reached the front of the store to make my purchase, I knew that they were an impulse buy and I didn’t come to the store for those items today. So I handed them over and let the cashier know I had changed my mind.  Here are my suggestions and techniques I use to avoid this pitfall.

The 24-Hour Rule: Implement a rule to wait 24 hours before making non-essential purchases. This is especially helpful with internet and app purchases. Add the item to a list and you can come back to it after 24 hours if you are still keen on making this purchase.

Shopping Lists: Always shop with a list to avoid unnecessary purchases. If you are going Birthday shopping, bathroom remodel shopping, or grocery shopping – Make a List. A list helps you to stay organized, ensure you don’t have to keep coming back for missed items, and it helps to stay honest and true to your planned purchases. I really enjoy the Google Keep App for my shopping lists. I can share them with my partner or a teammate I might be planning an event with to keep us organized and on budget.

Limit Exposure: Avoid situations where you're tempted to spend impulsively, like window shopping or browsing online stores. YES if you don’t put yourself in a place to make purchases you are less likely to make an unplanned purchase. Unsubscribe from all of those marketing emails, or set up a rule in your email folder to send all of those marketing emails to one folder. Turn off your phone notifications from shopping Apps so you’re not so tempted. I love some high-end clothing brands so I joined a few Facebook groups that sell these brand items second-hand – well guess what happened? I found myself buying items because it was a “good deal.” I unfollowed those groups and I only pop into them when I am ready to make a purchase with a plan and go looking for a great deal.

Budgeting for Fun: Allocate a specific amount in your budget for discretionary spending. This allows you to indulge occasionally without derailing your finances. You shouldn’t be so strict that you can have fun, and when we budget and plan for fun then it feels good to use those funds for fun!

Credit Card Misuse:

              This is truly an epidemic in our country credit card usage has become so standard that it is hard for people to even view it as misuse at this point, it has just become a way of life. Credit cards can be a convenient financial tool, but misuse can lead to significant debt and financial stress. Common mistakes include carrying a high balance, missing payments, and only making minimum payments. Don’t get me wrong credit is important to have and utilize in most communities in our country at this point depends on the ability to verify your financial worthiness through your credit score. So with that in mind, it is important to safeguard your credit.

Use Credit Responsibly: Only charge what you can afford to pay off each month. If you can’t afford to pay it off each month then it is time to put the credit card in the freezer and plan a debt repayment plan.

Pay in Full: Avoid interest charges by paying your balance in full each month.

Monitor Statements: Regularly review your statements for errors or unauthorized charges.

Set Alerts: Use alerts and reminders to stay on top of payment due dates and avoid late fees. Add these due dates to your calendar with an alert and give yourself enough time to schedule a payment. Or better yet set up the credit card or accounts to auto debit your checking account to ensure that the full amount due is paid each month. This will eliminate missed payments and late fees.

Lack of Emergency Fund:

An emergency fund is a financial safety net that covers unexpected expenses such as medical bills, car repairs, or job loss. Without it, you may be forced to rely on high-interest credit cards or loans. I know it can seem daunting to consider putting money aside if the budget already feels tight but I assure there is 50 cents or five dollars a paycheck you can put away. Once you start saving something your savings habit will grow.

Start Small: Begin with a goal of saving at least your car and homeowners insurance deductible. If you don’t know what that number is then you need to look it up . Once you reach this goal then you will have enough saved to pay those deductibles should a need arise to put in a claim with your insurance. The next small goal to reach is getting an additional $1,000 into your savings fund. $1,000 in cash savings will cover a decent amount of financial hiccups that could come your way. Then the next step in your small savings goal is to gradually build up to 3-6 months' worth of expenses. If you don’t know what that number is then it is time to check back in with your spending plan.

Automatic Transfers: Set up automatic transfers to your emergency fund. As we talked about last week those automatic set them and forget them savings deposits are going to make a difference in your ability to avoid financial pitfalls. Once your budget has evened out that you don’t even notice those savings transfers happening then you can up that transfer by a few dollars to keep that momentum moving along.

 Accessible Savings: Keep your emergency fund in an easily accessible, but separate, savings account. This ensures quick access when needed but keeps the money out of sight to reduce spending temptation.

Increase Contributions: Gradually increase the amount you save as your income grows or as you pay off other debts.

Ignoring Insurance:

Insurance provides financial protection against unforeseen events. Ignoring Insurance is easy to do but it can end up being a huge money loss over time. Also, I am guilty of this pitfall. It is easy to find an insurance company to agree to a policy and let the policy just renew at the end of each term. Many times insurance companies offer you a discount for longevity and having multiple policies with the same company which can be a pitfall to encourage you not to shop for another company. But let me suggest that you shop at least yearly if not before the end of each policy renewal.

Regular Reviews: Review your insurance policies annually to ensure they meet your current needs. You might have had a life change and you might need more or less insurance. Ensure you understand what you are paying for and call and ask questions. If you're not sure what you are reading get educated reach out and we can do a topic-specific appointment to go over your insurance policies and questions you have so you are better prepared to shop around with an agent.

Adequate Coverage: Ensure you have sufficient coverage for health, auto, home, disability, and life insurance. So many of us opt for the easy or least expensive coverage available. In the long run, you are putting yourself at a great disadvantage financially by not adequately mitigating your financial risk.  Did you know that 1 in 10 Americans will become disabled in their lifetime limiting their income-generating years this will impact not only their current lifestyle but also their retirement opportunities. Most disabilities don’t happen at the job site so workman’s compensation will not be an option if this happens. Have you considered that you might need Disability insurance?  Many homeowners underinsure their proprieties because they don’t fully understand the 80% coinsurance clause in their policy. If you are not familiar with this term, check your policy and see what it says.

Shop Around: Compare rates from different providers to get the best deal. Call different Insurance agents or reach out to a broker and see what they can offer you. However, make sure you understand your current policy and your current insurance needs before you accept a lower premium as you might also be accepting a lower coverage.

Retirement Savings:

Many people delay saving for retirement, thinking they have plenty of time. However, the earlier you start, the more you benefit from compound interest. Although do not despair the only time it is too late to start saving is never, and the best time to start is today. Some reasons that people find themselves postponing retirement savings might be to pay for immediate expenses. Again I would argue that you have even a few dollars to begin a savings. Often times people are not taking full advantage of employer-sponsored retirement plans, you might be missing out on additional money that your employer would add as a match. Underestimating the amount needed for a comfortable retirement, it can be hard to fathom what the number looks like, but I promise you there are tons of great free calculators that can point you in the right direction.

Start Early: Begin saving for retirement as soon as possible. Even small contributions can grow significantly over time due to compound interest. If you are not saving for retirement now I challenge you to make a plan and get started this month on your retirement savings.

Employer Contributions: Take full advantage of employer-sponsored retirement plans, especially if your employer offers matching contributions. This is essentially free money for your retirement.

Increase Contributions: Gradually increase your retirement contributions over time, especially as your income grows or you pay off debts.

Diversify Investments: Spread your retirement savings across different investment options to minimize risk and maximize returns.

Falling for Financial Scams:

Scams are designed to deceive you into giving away your money or personal information. They can take many forms, from phishing emails to fraudulent investment opportunities. Financial Scams are getting more and more sophisticated and I know many money savvy people who have still fallen victim to a financial scam. Some of the ways that people are falling victim to these scams are receiving an email or phone call asking for personal information under false pretenses. Investing in a "too good to be true" opportunity that promises high returns with little risk. Falling for a fake charity scam, especially during times of crisis or disaster. So what can you do to protect yourself from scams?

Be Skeptical: Be wary of unsolicited offers or deals that seem too good to be true. Scammers often use high-pressure tactics to get you to act quickly. This includes scare tactics like telling you someone has been arrested and needs bail money. Verify sources ask lots of questions, and take down information like phone numbers, names, dates, times, and details of their request. Then start to investigate the information they have provided you. Remember to take a deep breath and step back from the situation call a friend and ask their thoughts and opinions.

Verify Sources: Always verify the legitimacy of the person or company contacting you. Check for reviews, consult trusted sources, and use official contact information. Call the company back and verify the information. Don’t call the number they called you from or reply to their email.

Secure Information: Protect your personal and financial information. Use strong, unique passwords for online accounts and enable two-factor authentication where possible.

Educate Yourself: Stay informed about common scams and how to avoid them. Regularly update your knowledge about cybersecurity and fraud prevention.

Actionable Tips to take after reading:

• Implement the 24-hour rule for purchases.

              Bonus tip – write down everything you say no to and the amount for a month – then take some of those no dollars and add them to your Yes Savings Fund!

• Pay off your credit card balance monthly.

• Build and maintain an emergency fund.

    Let’s celebrate reaching those funding goals. Let me know when you reach them and I will celebrate you and your hard work!

• Review and update your insurance policies regularly.

• Make a plan to begin, check-in, or increase retirement savings.

• Educate yourself about financial scams.

By understanding and recognizing common financial pitfalls, you can take proactive steps to avoid them and maintain a healthy financial life. The strategies outlined in this blog are designed to help you mitigate risks and make informed decisions that support your long-term financial goals.

As you move forward, remember that financial health is a journey, not a destination. Regularly reviewing and adjusting your financial habits and strategies is essential to staying on track. If you stumble, don't be discouraged—use these experiences as learning opportunities to strengthen your financial resilience. Know that your Financial Stress can become your Financial Success.

Stay tuned for our next blog where we'll explore cultivating a positive financial mindset. This mindset will empower you to make wise financial choices and remain committed to your financial goals, ensuring a prosperous and secure future.