3 debt traps that prevent you from saving

Tips

The older we get the more complex our financial affairs can become and unless we are very lucky we will all have debt in one form or another during our lives. One of the secrets to creating good cash flow and building your savings is to try to avoid some common debt traps.

1. The excessive home loan

Home ownership is the great Australian dream. It feels good to take the plunge into the property market because one day you would like to have the security of owning your home outright and you hope your house will increase in value.

Unfortunately some home buyers get carried away with the dream and do not consider the reality of servicing a large loan. To buy their dream home they may borrow an amount that appears to be within their means to repay, however they haven't planned for changing circumstances, such as rate increases or loss of income.

Buying a home or investment property commits you to making loan repayments for a long-term, so it's a commitment you need to be well prepared for.

However, using your home loan effectively can assist your wealth creation goals. By making your money work harder for you, rather than the other way around, you could be paying off your home loan sooner and building an investment portfolio at the same time.

2. Impulse purchases

There are times when you just have to have something now. You need a new car, or your children need new laptops for school. The only problem is you don't have money in the bank to cover these costs. Credit cards and personal loans can help you manage these cash flow dilemmas in the short-term, but you may want to use them in moderation. Sometimes you genuinely do need these items now, but sometimes you may be able to wait a little longer. Think carefully before you spend and make sure you have enough money to pay back the debt.

Using your home loan effectively can assist your wealth creation goals.

3. Misuse of credit

Using credit cards can be a very convenient way to pay for everyday expenses such as groceries and bills or the occasional bargain at the summer sales. It's easy and you don't need to carry cash around or worry that you will have enough money to pay for your needs. Most credit cards come with interest free periods, so provided you pay off the full balance at the end of each month, you usually won't be charged with an extra amount of interest on top.

However, there are risks with using credit cards and they are not suitable for everyone. If you have a credit card, you should make sure you have enough money to pay off the monthly balance. If you don't pay off the full outstanding balance each month interest will start to add up.

It is important to use your credit card wisely and ensure you are not spending beyond your means. Learn some tips to keep you on track with your credit card spending.

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