Managing money is not as easy as it sounds. Your employment, your home, your expenses, your lifestyle – everything impacts your finances. How do you protect your finances to lead a stress-free life? What changes should you adopt to master your money? In this article, we will discuss the 5 moves that can ruin your finances and how you can avoid them.
If you are working on building an excellent credit profile, it’s crucial to keep an eye on your credit reports. Credit report records your financial behaviour and so, tracking them makes your job easier. You can easily spot and rectify the underlying issues. Also, reviewing your credit report (at least once a year) will help you in improving on the concerned areas to build your credit profile. However, only following your credit reports will not be beneficial in building your finances.
We often end up making some moves that might not show up on the reports but could still disturb our credit score. While there may be some other moves – which may not sting your reports but could still introduce a series of financial problems later. Although your credit score is the forerunner of your personal finance, there are different yardsticks to measure different financial habits.
Know where you stand in your financial life now and then. An overall snapshot of your finances is an important tool in the process of living a financially independent life.
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
1. Draining your emergency fund
The purpose of an emergency fund is to help you financially when you need it the most. It acts as a safety net, something that we can fall back on whenever facing financial difficulty. Do not take out money from the emergency fund for every small expense that you need to manage. Doing so will build a habit of taking out money from it even when the expense is not so necessary. So, instead of eliminating the unnecessary expense, you keep using the money from your emergency fund.
Keep a small portion of your monthly income for an unexpected expense rather than relying on your safety net. You may need a huge amount of money later in life for funding your home improvements or to tie the knot.
2. Co-signing a loan application
If you are considering to co-sign a personal loan application, then wear your thinking cap again and reconsider your decision. Helping someone who is in need is a great thing to do but it may backfire and spoil your finances. Yes. Co-signing a personal loan application may have a severe impact on your finances.
In case of a default on the loan by the primary borrower, the lender will expect you to make all the remaining payments. If you do not keep up with the repayments, the lender may take legal support against both of you to recover the money. Being a loan guarantor comes with a huge responsibility.
Understand your responsibility and your rights before you sign on the documents to become a loan guarantor.
3. Not sticking to your budget
This is the primary thing that you need to take care of amongst all others. A budget is an extremely beneficial tool that shapes your finances. It helps you in tracking your money so that you can use it judiciously, without overspending it.
Budgeting may not sound fun but there are a lot of ways you can make it fun and exciting. Not following or sticking to a budget may lead you to spend money unnecessarily. And unnecessary spending will create a financial dent. Apart from that, you will find a lot of challenges to meet your savings goal. Sometimes, you may also land up in debt.
Take out a few hours every week and comb through your expenses of the last week. Set up the budget for the next week accordingly. Here are 5 budgeting systems that will help you keep track of your finances.
4. Making minimum repayments on your credit card
When you choose to make the minimum repayment on your credit card – you are accumulating debt. Interest will be charged on the unpaid balance and gradually you will end up paying way more than you had spent in the first place. If possible, or say, whenever possible, make more than the minimum payments. The unpaid balance on a credit card may result in a higher credit utilization ratio. A high ratio impacts your credit score too.
Cut down unnecessary expenses and do not take on new debt until you pay off the current one.
The more you pay towards the debt, the faster you will become debt-free. Also, you will save a lot of money in terms of interest.
5. Borrowing more than you can afford
It’s a mantra that will save you from a hundred or maybe thousands of pound. Ensure that you borrow well within your affordability. Personal loan offers may tempt you to borrow more. With an easy and fixed monthly repayment structure, you may get carried away for a while. However, remember that you are responsible to pay whatever you are taking out from the lender.
If you borrow an amount that you cannot repay, it will impact your credit score. Not only that, but the lender may also decide to take legal action and you may end up with a County Court Judgement. Also, it will impact your future borrowing experience.
Plan in advance and calculate the amount that you need and how much of that you can pay back without any trouble.
Building healthy financial habits
Rome was not built in a day. Habits take years to form, but once you develop the right set of habits, nothing can stop you from achieving financial independence. Financial anxiety is one of the common concerns that you may have to deal with while improving your money management skills. You have to spend mindfully, for which you will have to differentiate between your needs and wants.
Small habits will help you make better financial decisions and without building good and healthy financial habits – it will be difficult to achieve financial success in life. Each one of us will have our aspirations and desires. And the truth is it is not possible to satisfy each one of them every time. You will have to set your priorities. Separate your needs from your wants, save as early as possible and regularly, take advantage of tax savings plans, and invest in creating a stable financial base.
