Debt is a controversial subject nowadays. There are many out there who will tell you to avoid it entirely. On the other hand, there are many who say it is vital to optimize your wealth accumulation. As with most things, the answer may lie somewhere in the middle. While debt is the easiest way to rob you of your monthly income, it can also provide assistance in growing your wealth as long as you use it wisely. When jumping in to the debt game, it is important that you don’t buy into the common pitfalls that leave people out to dry. So, to assist you in that aim, here are the top 3 debt mistakes people tend to make, and how to avoid them.
If you ask any extremely wealthy person what the average consumer does wrong, this will probably be the most popular answer. New cars seem like a great value, and they signify a really big step in life for a lot of people who buy them. Nowadays, everybody thinks that because a car looks really nice and has a lot of features, it must be a “good” car. Unfortunately, this leaves many 20-somethings thousands of dollars upside-down on a Kia or Nissan that doesn’t run after the warranty is up. “Cheap” new cars are almost worse scams than the expensive ones, as they leave you stranded on the roadside, $6000 in debt, and stuck trying to sell a car worth next to nothing. On the flip side, expensive cars depreciate hard the moment they are driven off the lot. With these, you end up paying up the wazoo just to have the value drop the next day. Used cars avoid these problems, and you can find a great car out there with only the down payment you were going to use on a new one!
Credit Card Rewards
With very few exceptions, rewards cards are a bad idea. They prioritize perks over a good rate, and require you to spend like mad in order to reap any benefit. These offers seem enticing at first, but they lead to a very jumpy trigger finger when it comes to using the card. After all, if you feel like you’re gaining something by spending, you’re going to spend more. Little by little, your balance grows and grows. After a while, you end up stacking immense interest payments because you weren’t focusing on rate. The bottom line is this: If these rewards programs were really benefiting the consumer at the expense of the bank, the banks wouldn’t offer them in the first place.
Student Loans (In Most Cases)
This one has some pretty huge caveats, but it is nonetheless one of the biggest and most popular mistakes of the generation. This isn’t to say nobody should take student loans ever, but think about it: If a bank wouldn’t loan you the money, there is probably a good reason. Most people do not get degrees that lead to jobs with enough income to pay off their loans. Doctors, Lawyers, and other highly lucrative (typically STEM) fields are exceptions, but even they struggle at first. There are a few easy ways to reduce your student loan burden, if not completely eliminate it altogether:
- Work for 1 year before you go to college. Note how I didn’t say “gap year”. This is because we are not traveling, vacationing, or relaxing; we are working. Get an idea what you will spend when you get a paycheck, and how much you’ll have left over. Get an idea what full time work is like, and see if you could maybe enjoy moving up in a job that doesn’t require a degree. Even better, you might find a job that will pay for your degree.
- Community college is there for a reason; use it. Don’t fall for the 4-year university trap. Save the “college experience” for when you are 21, and spend 19 and 20 at a basically-free college and get your gen ed out of the way. You often get more attention from professors at these institutions anyway, which can help you succeed instead of wasting cash failing your classes.
- Don’t take loans out for a degree that won’t make you money. I will never tell you not to study your passion, but do it for free online until you have the funds to support it. Odds are, your dream major will still be attainable five or ten years down the line. Build some good habits, get a solid income, and pad your resume with diverse work experience while you save up the money to do what you love. There is no easier way to ruin your dream job than to have it soiled with the stress of making your student loan payments– especially if there is no way you will.