Ever find yourself asking, “Why don’t I have more money?” You might be making one or more of the Top 5 money mistakes that keep you in debt and stressed out about money.

Avoiding these mistakes could save you $1,200,000 or more over the course of 30 years. Keep reading and start saving.

Mistake #1: Mismanaging Credit Card Debt

Having credit card debt is the most common and most costly mistake people make. Credit card math is different than regular loans, and it is aimed at keeping you in debt. The monthly minimum payment amount on your credit card bill is calculated as a percentage of the balance of the loan (usually between 1% and 4%). As you pay off the card, the payment gets smaller. This pushes the payoff way out into the future and makes paying them off really difficult. That’s called declining amortization- the payment declines over time. A regular loan has a level or straight payment- the payment stays the same.

If you carry an average balance of $11,170 in credit card debt for 30 years, your average payment would be $234/month and you would pay $107,980 in interest alone. If you did not have that credit card debt and invested that money instead, you would have $348,744.

The Fix: You need to pay off all debt, of course. But how? Most people throw some extra money at all their bills then get frustrated when they don’t go down. To see progress focus on one debt at a time, starting with the lowest balance first. Once you have that card paid off, you can put that same payment amount toward the next debt then put both of those toward the next one, and so on until they are all paid off. Not only can this “snowball” method save you thousands in interest payments and get you out of debt decades earlier, but “seeing the light at the end of the tunnel,” so to speak, can also spare you countless amounts of stress and worry.

Mistake #2: Lacking Emergency Funds

Lack of an Emergency Fund, even a small one, is a major cause of personal financial collapse. Life happens. Seventy five percent of us will have a major negative economic event every 10 years. Not having an emergency fund when something breaks means you reach for the credit card. Then you are financing the emergency for years to come and at an increased cost. The big emergencies are even tougher and harder to pay for.

The Fix: Put $200 in an emergency fund ASAP. Then build it to $1,500. Then you can raise all of your insurance deductibles to $1,500 since you are now self-insured to that amount with your emergency fund. Your insurance bills will drop considerably, and you can use that saved money to pay off credit cards, or invest it.

Mistake #3: Spending Unconsciously

We are all going to spend our money, one way or another, but too many of us spend too much of it without purpose. If we are not clear about what is important, if we don’t define where we want to spend our money, someone else will. This is what marketing is all about- getting people to spend money on things they don’t really need and can’t really afford.

The Fix: Start by setting clear priorities. First determine your cost for basic living, your survival expenses. This is usually a fairly easy number to find. Just total up the receipts and bills you pay for Housing, Utilities, Transportation, Food, Clothing, and Insurance, etc. Now that you have survival covered, ask yourself: What is important to you? Think in terms of fulfillment. What things (that cost money) bring you the most joy and fulfillment? Consider things like retirement, vacations, education, or home improvements. Only spend money on top priorities in your life.

Now that you know where you really want your money to go, it’s important to track your current spending patterns. Do a money log for 30 days. After you spend money- any money- write down the date, who got your money, how much they got, and then write a plus (+) or a minus (–) sign. The plus means this expenditure was in line with your priorities, your goals; it was a good purchase. A minus means it was not. This is a pain in the neck, but it will get you very conscious about where the money goes. Watch how you start to self-regulate after about 2 weeks. You will start to see more pluses than minuses. Note: If you save yourself an average of just $75 per month and invest that at 8%, you will have an extra $111,776 in 30 years.

Mistake #4: Overspending on Car Loans

Let’s look at the cost of buying a new car, for $20,000, every 5 years:

Payment (at 5.99% for 5 years): $386/mo
Total Paid Every 5 Yrs: $23,160
Total Spent in 30 years (6 cars): $138,960

Over time, buying new means spending tens of thousands more, and you end up with a car worth $12,000 because new cars lose about 40% of their value in the first 4 years.

The Fix: Buy a four year old, or older, car and pay cash. Note: if you could invest that new car payment of $386/mo at 8% for 30 years, you would have $575,278. This is what personal economics is all about- choices. If you choose the car loans, you do not get the $575,278 in the future. Which is really more important to you?

Mistake #5: Having the Wrong Home Loan

• 83% of home loans have over $3,000 in hidden fees/costs
• 85% have inflated interest rates
• 50% of sub-prime loans should be prime
• And 40% of borrowers are totally confused

The wrong home loan can cost you thousands over time and create serious financial difficulties. There are 2 terms you should be familiar with when it comes to home loans: PAR and Rebate.

PAR is the interest rate of a loan based on your credit score with no points being paid to anyone. (In mortgage-speak, 1 point is 1% of the loan amount, 2 points = 2%, etc.) Most people are familiar with the idea of paying points.

Most people do not know about Rebate (aka yield spread premium). Unethical loan officers will collect rebate money, paid by the lender, if they can talk you into a loan with a higher interest rate (higher than the PAR rate). You pay for this kickback to the loan officer in a higher monthly payment for the life of that loan.

Ever wonder about those “No Cost” loans? A “No Cost” loan has a high enough interest rate so the rebate covers all costs and commissions. There is no free lunch, and there is no such thing as a “No Cost” loan.

What is the cost of one wrong home loan with an inflated interest rate and hidden fees? Between the extra interest and higher payment, estimated losses total about $364,272.

The Fix: The key to finding the right home loan is to match what you can really afford to a loan program you can live with (instead of getting sold a loan that profits the mortgage broker or loan officer). Know your credit score and ask for rates at PAR. Ask how the loan officer will get paid (origination fee or rebate from the lender), and avoid rebate loans and how much they will get paid. Get three quotes at PAR, analyze and compare, and look for “junk” fees. Or get a Mortgage SOS (Second Opinion Service).

Financial Fitness To-Do List:

1. Start an Emergency Fund: $200 to $1,500
2. Do a Spending Plan: Define what is important to you and spend accordingly
3. Reduce/Eliminate Debt:
• Pay cash for cars at least 4 years old.
• Eliminate Credit Card Debt with the Snowball Method
• Get the Right Mortgage

Money Metrics helps people hang on to more of their money. The Money Metrics Manual, online learning modules, articles and more are at ASKMoneyMetrics.com, or call Bob Pessemier at 425.373.4045.