There are a lot of financial pitfalls you need to be aware of even at the start of the year. It is a good practice to make sure your finances are in order and laid out early in the year. This helps you tackle debt problems, investment issues and even opportunities you can look into. Here are a few things to look into when you want to nip financial problems in the bud at the start of the year.
Maxing out your cards is one of the financial pitfalls
The new year is usually welcomed by a lot of consumers with a clean slate. It is not uncommon for a lot of people to pay off their credit card debt before the year ends. This is to help them welcome the new year with zero debt on their card. However, it can give people the wrong sense of financial security. It is tempting to use a clean card and it would not take long to max them out. You need to keep an eye out when using credit to pay for items early in the year. The last thing you need is to play catch-up with your payment too early in the year. It does not set a good tone and you could lose faith early in the game.
Applying for too many credit cards
There are a lot of companies offering low-interest rate credit cards and they are quite tempting. However, this is not the only thing you need to look out for. For one, these rates could just be introductory rates. This means that after you have signed up, you run the risk of carrying cards with high-interest rates. Sometimes, they could be higher than your existing cards, Having a lot of cards can also complicate your budget. You might have a hard time tracking which card is for what expense. You also need to remember that every card application warrants a hard pull on your credit score which lowers down your score.
Taking out big ticket items
There is nothing wrong with a planned purchase regardless if they are expensive and considered big ticket items. The problem lies when these are done on impulse making it one of the financial pitfalls you need to watch out for. It puts your budget in disarray early in the year. You also have to redo your goal setting because you might need to move debt payments around. This is to accommodate huge payments from your impulsive expense. Be wary of taking out high expenses at the beginning of the year especially as you are just starting to gain headway with your financial plans.
Paying high interest on your purchases
One of the disadvantages of a low credit score is having to content yourself with high-interest rates. The way it works is that a low score means you are a risky borrower. In order to cover for that risk, lenders would be charging high-interest rates. This is meant to protect their funds as well as earn money along the way. The way around it is to be cautious with your credit score and make sure that you are able to maintain a fairly decent number. If not, you have to make do with high-interest rates on your purchases. Creditcards.com shares that late payment on cards is one of the reasons for paying higher fees. It is also one of the leading causes why credit scores are also low.
Dipping into your reserve funds.
There is nothing wrong with dipping into your reserve funds at any point in time as long as you really need it. The problem starts when you have a loose guideline on what an emergency is. For some, it means losing a job or being hospitalized for an extended period of time. For others, a party invitation is an emergency because they need a new set of clothes or a pair of shoes. You need to have a definite guideline in identifying emergencies from mere wants. However, you have to remember that what could work for some people does not automatically work for you. It is important to consider your lifestyle and budget when drafting what an emergency is.
Switching to new gadgets.
There are quite a number of people who have varying views and opinions regarding the purchase of new gadgets. There are those that believes these types of purchases are a necessity. On the other hand, there are people who view these expenses as mistakes waiting to happen and is one of the many financial pitfalls. For one, Businessinsider.com shares a great point on how to strike a middle ground between the two sides. The idea is to wait for a few months after the hype on a new product release has died down. By this time, there would already be unbiased reviews of quality and durability. There is also a big chance that people who bought early would be selling them off in anticipation for a new one. If the gadget is something you need especially in your line of work, this seems like a good strategy.
Front loading your rewards is another form of financial pitfalls
Consumers should not confuse financial rewards with that of credit card rewards. This has something to do with the rewards you have in your budget. If you employ the strategy of putting rewards across milestones in your finances, then this is for you. If you have a trip as a reward once you hit a savings goal in the middle of the year, you might be tempted to take that trip now. Your thinking, you will take it anyway so why not now? However, once you frontload your rewards, it loses its purpose. There is a big chance that you would not be excited to reach your goal anymore. Add the fact that you have incurred expenses early in the year. This is why it’s best to leave them where they are so you have something to look forward to.
Failing to check your credit score.
Consumers have the habit of checking their appearance in the mirror. There is a big chance that this is something they do every morning. The same should be done with the credit score. One of the many financial pitfalls of consumers is forgetting to check their score. This is a financial habit that you need to develop over time and the best time to start is now.
The good news is that you can get a free copy of your credit score through the Fair Credit Reporting Act or FCRA. According to Consumer.ftc.gov, people can request a free copy of their score once every year. Equifax, Experian, and TransUnion will provide this free of charge. You need to check your score in order to know where you stand financially. You would have an idea how to direct your efforts at the beginning of the year in consideration of your score. It can be ways to increase it or simply to maintain it.
Not checking how your investments have performed
If you already have investments, that start of the year is a great time to inspect how they have performed. Apart from being on top of your investments, you also get the chance to make some improvements on your investment strategy. You can even check if you are unknowingly following any harmful investing myths you need to correct instantly. One thing you need to manage in your investment is the risk. That is something you need to taper down on as you mature and grow older. The reason for this is that losses incurred at an old age are quite harder to recoup. This is why you need to take on lower risks as you near your retirement age.
Consumers needs to be on the lookout for financial pitfalls early in the game and in this case, at the start of the year. There is no question that you have to be in control early on and these are just some of the things to help you do just that.