Do you know the best way to catch a wild animal in the wild?
Yes, you set a trap.
Scary as it may sound, there are traps laying around, lurking in the wild, waiting for us to fall into them.
These are no normal traps either, they are specific traps use to trap us, humans. With their sharp claws, they will tear through our wallet and take all of our money.
We call them the money traps.
You might be making a good progress on your money goals, then suddenly you get hit with hundreds of marketing messages, “deals you don’t want to miss” or “a once in a lifetime opportunity”.
Maybe just checking them out won’t harm right?
Who wants to miss out a sweet deal right?
Stop! It might just be a trap! A money trap to be more precise.
“When a deal is to good to be true, it is too good to be true.”
7 worst money traps to avoid are:
- No-Money-Down Plans
- Risk-Free Trials
- Investment Scams
- Credit Cards
- Payday Loan
- Car Leases
- Variable Mortgages Rates
Worst Money Trap to Avoid
There are many money traps out there in the wild. But these few money traps can cause you your future if you do not handle them properly and fall into them. Some might seems obvious, while others seems invisible to most people. Here are the money traps you have to 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.
This trap come in a few names, some call it the no-money-down plan others call it a 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 Fix
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 like a smart TV gets cheaper over time.
2. Risk-Free Trials
Everything about this name sounds risky to me. One of the scariest money trap is making you into believing that it is risk-free. This 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 Fix
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 Fix
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
You are telling me that Credit Cards are a money trap?
Are you for real?
I’ve been using credit cards since I was a kid!
Relax! I know how you feel, and how common credit cards are actually in our society. In fact, credit cards can sometimes help us save money in the form of cashback or points. If you are one of them, then congrats.
But is it true that all people really do save money by using a credit cards?
Truth to be told not a lot of people really save money by using credit cards, instead they 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 Fix
Here are some suggestion:
- 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
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. Because it is fast and easy process for applying the loan, it 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 Fix
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 Fix
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
The variable mortgage rate is sometimes called as the adjustable rate mortgage (ARMs). Mortage 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. Most of the mortgage loan have a variable rate of less than 1%. During this time, 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 Fix
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. You will prevent yourself 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.
Or you can check how much do you need to pay in our home mortgage calculator.
There are many money traps in our society which is waiting for people to fall into them. Learning some of the most common and worst money traps allow us to identify them and avoid them.
You have work hard for your money and I believe you want to keep them safe from those scary money traps that tears open your wallet and grab your hard earn cash.
Educate others whom you think this might be useful to them as well, so that when they identify a money trap, they may too be safe from harm. And may able to warn you about the trap as well.
Since, we are on the topic of personal finance. Here is an article where we talk about preparing for your retirement. Probably you may want to check it out as well.
Read Also: How much do you need to Retire?
If you are interested in retirement numbers, here is an retirement calculator for you to calculate how much do you actually need for retirement, if you do not create an passive income steam.
Tools: Retirement Calculator
There are definitely many other ways of making passive income for retirement, but these mentioned in this article are some of my favorites!
Read Also: Passive Income vs Active Income
Remember! 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!
Trust me, it will definitely be worth 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.