Have you fall for any money traps before?
You might be making a good progress on your money goals, then suddenly you get hit with seemingly great deals.
Maybe you can save some money by buying from these deals?
Stop! It might just be a trap!
“When a deal is to good to be true, it is too good to be true.”
What is money trap?
Money trap are traps that makes people spend money on things or service that they don’t required or need. These traps prevents hardworking people from growing their wealth and make them work till 60’s in order to make enough to retire.
People who are in the money trap do not have enough savings to invest, or money to grow their wealth
Often, people who are in the money trap will trade time for money. These people will only be paid for the hours that they’ve work.
Biggest Money Traps to Avoid
Financial traps can cause you your future.
Although there are many money traps you’ll need to avoid in your 20s and 30s, most people fall into these money traps unknowingly.
Here are the biggest money traps you must avoid at all cost!
1. No-Money-Down Plans
See that new smart TV which you have always wanted?
It cost a bomb, but fret not, the advertisement says you don’t need to pay a cent right now to enjoy all its goodness.
It even offers a no-money-down plan! Or so you thought.
“No-money-down plans” are sometimes also called “no-interest installment plan”.
Ignoring what they are call, you have to pay what you own someday. The payment terms usually split into 12 months period to 36 months period.
By purchasing that Smart TV which you will essentially not watch every single day, you are now in debt for then next few month. Possibly scratching your head thinking of how to finance your new purchase.
The no-money-down trap is essentially another trap to get you locked into making long-term payments on stuff you can just pay up front.
How to avoid overspending?
Save up the cash you need for the purchase and pay in full.
When you want to enjoy something, enjoy when your wallet says you are ready.
PS. Electronics often gets cheaper over time.
2. Risk-Free Trials
Everything about this name sounds risky.
Scariest characteristics of a money trap is to make you into believing that it is risk-free.
Falling into this money trap is simple and comes in just 2 steps:
- Free trial with subscription of $0 for the first 30 days
- Fee of $XX amount for the subsequent months
The key to this money trap is that, most people forgot to cancel the subscription after the first 30 days even if they are not using the service.
This actually happens to me when I subscribe to an essentially $0 trial to use a certain animation software.
Even when it doesn’t suite my needs, I forgot to cancel the subscription.
The bill came weeks later of a whooping $167.
This really hurts my wallet.
How to avoid psychological money trap?
If you are having some risk-free trials, make sure you cancel the service once you feel that it doesn’t suits your needs.
Don’t wait for the last day of the trial before you cancel the service. You will most likely forget about it and end up paying more that you want.
3. Investment Scams
Most people want to make more money. We want a great lifestyle and free from all money related worries.
Sometimes, we get phone calls from people who may offer us some really sweet investment deals.
Deals which offer 10% or more fix return over the next few years.
Deals which says, it is only offered to a selected few whom the company have qualified with a set of stringent criteria.
These so call “Deal” are most likely to be investment scams.
They will use words to make you make the investment decision on the spot so you won’t miss out the ‘good’ offer.
Don’t fall for these investment scams. If it sounds too good to be true, it probably is.
How to avoid investment trap?
Stay vigilant. If you got a deal offered to you ask yourself these few questions:
- Why is it offered to me?
- What is the deal about?
- What do others think about the deal?
- Does the person wants me to make the decision now?
- Does the person allow me to do my own investigation on the company?
- Most importantly, does the deal sounds too goo to be true?
Our advice is not to take up any of these deals, but the decision is totally yours.
4. Credit Cards
Credit Cards? You are telling me that using a Credit Card is a money trap?
I know how you feel. Credit cards are commonly used by many people in our society.
In fact, credit cards can sometimes help us save money in the form of cashback or points.
If you save money by using credit cards, congrats!
But not all people use credit cards lead to savings.
In reality, most people spend more because of credit cards.
Credit card companies ‘hook’ new customers by offering you freebies when you sign up.
Just look at all those colleague students who have a dozen credit cards.
They haven’t started to earn a dime, but are already thousands of dollars deep in credit card debt.
Once you start adding up the taxes and hidden fees, the amount of credit card fees can be comparable to a loan shark.
How to avoid credit card debt trap?
Things you can do to avoid from falling into this money trap.
- Cancel all the credit cards which you don’t use.
- Keep only one credit cards just for emergency purpose.
- Avoid using credit card to buy items you don’t really need.
- Pay all credit card debt and not just the minimal sum
- Do not allow the credit card debt to roll over
If you want to learn on how to pay off your debt fast, here is an article that will give you a step by step guide to get out of debt and be debt free.
5. Payday Loan
What can be worst than a credit card debt?
You guess it right, it is a payday loan.
I understand that we do have unexpected financial emergency from time to time and will required some emergency fund to help us solve it.
If you do not have an emergency fund, which we highly recommends, you may be forced to take up a payday loan during an emergency .
Unlike a credit card which gives you some form of benefits such as cash back and points for using money.
A payday loan only does one task, it suck out all your money during your payday with ridiculous high interest rate.
Getting a payday loan is fast and easy, but paying it back will probably take forever.
Payday loan is one of the easiest and worst money trap anyone can be in.
Payday loan are the legal loan shark of your nightmare which you must stay away from.
How to avoid pay day loan debt trap?
Never get a payday loan!
If you need extra cash, get a side hustle or part-time job. You may even want to sell some stuff which you don’t need.
Whatever you do, never get a payday loan.
It is a money trap which will take years for you to crawl out of.
6. Car Leases
You are driving your economic Honda Jazz, small but comfy to be in.
Then your friendly neighbor next door drive up a brand new Audi R4 with tinted windows, golden car body and luxurious leather seat.
He have parked his majestic beast right beside yours.
You want that Audi R4 don’t you?
Won’t it be great if you can trade you old Honda Jazz for that majestic beast?
Just imagine driving in that beast, how great will it make you feel.
The luxurious feel of the leather seat, the sexy sounds of the engine and the the astonishing look on your colleagues.
Even if you can’t afford to buy it, you can still lease it, right?
Stop! Don’t do it!
Leasing a car can be one of the most expensive expenses you can ever make. Everyone loves nice stuff, that includes cars and bags.
If you need to lease an luxury item, you are spending over what you can afford, which can be very bad news for your personal finance.
How to avoid this lifestyle money trap?
Spend at what you need and not at what you want.
If you require a lease to get that luxury items, it means you are spending over of what your current capability is.
Don’t over spend your budget.
If you want to buy that expensive car or bag, save enough, so that you can pay for it when you are ready.
Learn how to create a home budget with a few simple steps in my other articles.
7. Variable Mortgages Rates
Variable mortgage rate is sometimes called as the adjustable rate mortgage (ARMs). Mortgage rate generally comes in 2 different forms:
- Fixed rate where the interest you need to pay stays the same for a number of years
- Variable rate where the interest you pay can change from time to time
Years ago, after the great financial crisis of the 2008 (caused by subprime mortgage) the interest rate for a mortgage loan become very low as the Fed is trying to help the economy to recover.
During that time, most of the mortgage loan have a variable rate of less than 1%. Thus, most people take up variable mortgage loan or the adjustable rate mortgage.
But as the name implies, a variable mortgage rate or ARMs will have its interest rate fluctuates from time to time.
You will have no control over how much interest rate will you need to pay in the future.
You have a home mortgage of $500,000 payable over the next 30 years.
Currently you are paying a 3% mortgage rate, thus you will be paying $2,108.02 per month.
If the interest rate grew to 5%, you will be paying $2,684.11 per month instead.
You will need to pay an $576.09 extra with just an 2% in interest rate!
If you choose a variable mortgage rate or ARMs, you are essentially playing with fire.
How to avoid this housing loan money trap?
Simply choose a fix mortgage over a long period of time over variable mortgage rate or ARMs.
Although a fix mortgage requires you to pay a slightly higher mortgage rate.
You will be sure that, that will be the maximum amount you need to pay your mortgage over the next few years of fixed interest.
Fix rate protect you from getting any nasty surprise in the future if the mortgage rates goes up.
I will recommend to get a longer fix mortgage of over 15 or 30 years if possible.
This will help you in your financial planning and home budgeting for your future.
How to Avoid Money Traps?
The best way avoid money traps is to spend money only when you need it, not when you want it. Spending on your ‘wants’ is the most important reason why people fall into money traps.
There are many money traps in our society which is waiting for people to fall into them.
Learning some of the most common and biggest money traps allow us to identify them and avoid them.
You’ve work hard for your money and I believe you want to keep them safe.
Stay educated on personal finance, and you will be able to avoid any money traps that may come your way.
These articles can probably help you in your financial journey:
- How to create a personal home budget?
- How to get out of debt fast?
- How much do you need to Retire?
- Passive Income vs Active Income
If you want it badly enough to be financially freed and have control on your own life, you will do what it takes to achieve it!
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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.