How to Avoid the Biggest Stress-Inducing Financial Pitfalls

Finances are a major cause of stress in life.  If you lie awake at night, worrying about how to pay bills, you are not alone. Many people struggle to pay their bills.  Financial stress is a major factor behind arguments, being a major factor in most divorces.  Some people react to financial pressure by indulging in food.  If any of these describe you, here are some tips that can help you avoid the largest financial pitfalls of life.


Use a Budget

Most people dread budgets, but they are necessary.  When used properly, a budget will actually be easy to use and promote discussion, rather than division.  Your first few budgets will fail, but do not give up.  Accept the fact that budgeting is a process and learn to make adjustments to your budget.

A budget is a way to track all income and expenses.  This is the most basic personal financial tool.  It allows people to see what they earn and where they spend money.  Without a budget, families cannot understand their financial situations.

Businesses have large and complex budgets, but creating a personal budget is simple.  For most people, a monthly budget covers an appropriate length of time.

Begin by tracking all income and expenses for a month.  Every penny that is either earned or spent should be written down.  At the end of the month, these transactions can be used to forecast the next month.  For some, sources of income and expenses will need to be adjusted monthly; however, this record of a month’s expenses can act as a baseline for future budgets.  The income and expenses categories on a budget should be adjusted until the income is at least as much as the expenses.

Pay With Cash

Dave Ramsey, a well-known financial radio host has a slogan, “Cash is king.”  This is very true.  In movies and real life, peopled turn when a person pulls out a wad of bills, instead of a piece of plastic everyone else has.  There is a sense of awe with cash.  However, it also is king for very practical reasons.

Paying with cash will reduce financial stress.  Studies have consistently demonstrated that people spend more when they use credit cards than when they use cash to pay for items.  It is easier to swipe a plastic card than it is to count bills and coins.  When credit cards are used, it is difficult to visualize the money exchanging hands.  People who want to spend less should use cash instead of credit cards.

Cash also has no fees.  Cash does not charge annual maintenance fees, over-limit fees or interest, but credit card companies do.  A single missed payment to a credit card company can cost hundreds.

Some people argue that using a credit card is wise.  Transactions can earn points, which can be exchanged for cash back, airline tickets or merchandise.  However, the vast majority of airline miles are never used, and the few perks that credit cards offer are offset by the increase in money people spend with them.

Using cash can save families money in two ways.  They will spend less, and they will not have the burden of interest payments and fees.

Save for a Car

If this advice were given to a teenager who just got his or her license, the response might be “What?!?”  Saving for a car seems like an old-fashioned concept, but people who save now can eventually drive luxury cars.

It has become commonplace today to take out a loan for an automobile.  This was not always the popular trend.  Several decades ago, people saved up for major expenses, such as an automobile.  Saving for a car can save people thousands of dollars.  Cars can be purchased with leases, loans or cash.

Leases are generally the most expensive means of owning a car.  The typical lease lasts for three to five years. During this time, drivers are faced with monthly bills.  At a lease’s end, a vehicle is returned to the dealership, who will sell it as pre-owned.  The driver has nothing to show for his years of payments.

Loans are only mildly more attractive than leases.  With a loan, a driver pays monthly payments to a bank.  Many loans also last for around five years.  When a loan is fully repaid, the driver owns his vehicle outright.

But, the driver has paid much more than the original price of the vehicle.  During the loan’s term, interest was constantly being paid. Also during this time, the value of the vehicle depreciated significantly.

By saving up for a car and paying for it at the time of purchase, drivers are not faced with monthly payments.  They own their cars and trucks, and they can decide how to take care of the vehicles.  Cash is the best way to pay for a car.

Carry Adequate Insurance

With the competition in the marketplace, insurance companies are trying to lure people with savings.  There is nothing wrong to saving money by switching insurance companies, but customers should not sacrifice their coverage to save.

The goal of insurance is to protect people from disasters.  Your house likely will not burn down and you hopefully will never cash in that term life insurance.  However, having them reduces stress and provides a safety net.

With these tips, people and families can reduce their financial stress.  Often, younger adults hear their grandparents saying, “Use a budget.  Pay with cash.  Save up for a car.”  The generation giving this advice survived the Great Depression.  They have learned how to handle money with peace.  These methods work.

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Categories: Financial Knowledge