By Liz Pulliam Weston
In trying to unscramble a friend's finances, I noticed she was making a fat car payment. I knew she drove a clunker, so I couldn't figure out why she was paying so much.
Her previous car had needed a $2,000 repair, she told me. She had no savings or room on her credit card to pay the bill. But her friendly neighborhood used-car dealer offered her "easy financing" on another used vehicle -- at an astronomical interest rate, thanks to her bad credit -- with a monthly payment she could swing, just barely.
Of course, the cost of this loan meant she had no money left over to pay down her credit card debt, build up her savings or even properly maintain the vehicle. It didn't take much imagination to picture her even deeper in the hole next year.
Such are the economics of being broke.
When you don't have much money or the money you have never seems to last, you're constantly backing yourself into financial corners. Instead of gradually building your wealth over time, you tread water or go under.
In the past, you might have been able to count on raises at work and a gradually improving standard of living to bail you out. But those doors are closing for many because:
Incomes aren't growing the way they used to. In fact, when adjusted for inflation, median incomes are below where they were in 1999, the Census Bureau tells us.
Inflation and health care costs chew up a bigger part of what we earn.
More people experience wider swings in their income, as my colleague Jim Jubak explained recently in "Where did our financial stability go?"
A swing upward is great, but not if you base your spending on getting overtime at work and then your hours are suddenly cut or your job is eliminated.
It's setbacks like those that, when you're already broke, can easily send you over the financial edge into bankruptcy.
7 life-altering mistakes
With so many headwinds, it's more important than ever to get the basics of money management right. Otherwise, you're just guaranteeing you'll stay broke by:
Getting the big stuff wrong.
A lot of "save money" advice focuses on the little stuff: how to cut back on lattes or trim your utility bill by a few bucks. But those who are chronically short of cash often overspend on the big stuff, especially shelter and transportation.
If your mortgage or rent payment eats up much more than 30% of your gross income or your vehicle costs you more than 10% (including financing, repairs and gas), you're going to have a tough time making ends meet.
(MSN Money's Home Affordability Calculator offers a realistic look at what's truly manageable. And here's a great tip for estimating what you'll spend monthly on any given car over five years: Double the price tag and divide by 60.)
Confusing needs and wants.
This is a biggie, and it's a problem for people at every economic level. But when you're broke, the consequences of deciding you need something that's actually a want can be devastating.
Here's the drill: Our needs are few, and they include shelter, food, clothes, transportation and companionship. Our wants are endless and quickly will transform a need like clothing (which can be Goodwill finds or hand-me-downs) into an extravagance such as a new suit.
Figuring out what we really need, and how to get it for less, can help get our finances under control. If you find yourself saying, "I need a (whatever)," stop a moment and consider whether you really do. You probably don't have to live without it forever -- just long enough to truly get on your feet. (See "The difference between 'want' and 'need'? 3 months" on MSN Money's Smart Spending blog.)
Considering only the monthly payments.
Whole businesses thrive on getting you to ignore the total cost of your purchase. Payday lenders, rent-to-own shops and car dealerships want you to focus on the short-term payments, not the long-term expense. Avoid the first two.
Anytime you consider a loan, bring a calculator so you can multiply payments by the number of months you'll be on the hook to get the real cost of what you're buying. (See "Keep you old clunker or buy a new car?")
Failing to track where the money goes.
If you're broke, you need to find out where every nickel is being spent so you can make intelligent decisions about how to trim. J.D. Roth, the blogger for "Get Rich Slowly" and who dug his way out of $35,000 in debt, says getting a handle on his spending helped him turn around his finances. Technology makes that easier than ever before: You can use personal-finance software such as Money or Quicken, or sign up for an online solution like Mint, Wesabe, Yodlee or Quicken Online.
Carrying credit card debt.
You probably didn't mean to do it. You just ran into a jam one month and couldn't pay your whole bill, and somehow it has snowballed from there. But carrying credit card debt costs you a fortune and puts you at the mercy of credit card companies.
If you can't pay your bill in full, stop using credit. Pay far more than the minimum, and come up with a plan for paying it off entirely before you pick up the cards again. (See "Your 5-minute guide to managing debt.")
Living close to the edge.
Every setback is a crisis when you have no cushion. Failing to have any savings also increases the chances you'll bounce checks, incurring expensive fees, and pay bills late, trashing your credit scores -- those all-important numbers that determine how much you pay for loans, insurance and housing. (For more, visit MSN Money's Decision Center on credit scoring and read "Don't be duped by bounced-check 'protection.'")
Even a few hundred bucks can make a difference, so read "Why you need $500 in the bank" for details on building a financial pad.
Squandering what you have.
Most workers contribute to some kind of retirement fund, typically a 401(k) account that they can take to their next job or roll over into an individual retirement account.
But nearly half cash out when they leave a company. That's nuts. You lose a fortune in taxes and penalties -- and worse, you lose an even bigger fortune because the money isn't there to grow and support you in retirement. People who raid their retirement funds won't just be broke now. Later, they'll be old and broke, a pretty awful combination. (See "Retirement for the not-so-rich.")
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