You’ve graduated from college and landed your first real job. Congratulations! You’re now pulling an income much higher than you’re used to and may even be chipping away on those student loan debts.
If you thought you got all of the hard work behind you in college you’re in for a rude awakening. The real work starts now. If you’re not careful with your finances you’ll end up being sucked into one of these five debt traps.
Here’s what to watch for.
The Outrageous Car Loan
You’ve got a nice new job and you need a way to get around, it’s a given. While you start out looking for a suitable vehicle to get you from point A to point B you can easily end up with a money sucking, net worth draining, shiny new car.
It’s no secret that vehicles are one of the fastest depreciating assets around, but your car salesman is not going to tell you that.
What to Do Instead: Before stepping foot into a car dealership you first need to come up with a solid game plan. If you play your cards right you can snag your sweet ride without having a car payment. You need a budget that you can realistically afford and you need to stick with that budget. Go for a reliable used car that maintains some of its value over time. This way you’ll have the option of selling your old car when it’s time for a new one. Bonus points if you’re able to save up enough cash to purchase your car.
The Credit Card Reward Trap
Credit card rewards are a hot topic right now. On one side of the equation you have people taking advantage of the rewards and earning fancy vacations and tons of cashback. On the other side of the equation you have people trying to follow in those footsteps only to land themselves into deep, high interest credit card debt.
What the credit rewards churners don’t tell you is that to really reap the rewards you have to treat this game like a day job.
What to Do Instead: It’s best to just skip this trap altogether. Use credit cards as a way to build credit – not to earn rewards.
Neal’s Notes: If you have already fallen into debt are trying to scrap your way out, one of the best tips is to refinance your debt at a lower rate and use the extra savings to pay off your debt faster.
The More House Than You Need Trap
If you’re looking to purchase a home right out of college there’s a lot you need to take into consideration.
When you buy a house you not only have to cover the mortgage but you also have to pay property tax, homeowner’s insurance, and maintenance and repairs. Then there’s renovations and of course, furnishings.
What you think will be a $1,000 a month mortgage payment could actually end up costing you thousands of dollars per month.
Another factor to consider is moving. While in theory you could just sell your house and walk away, it doesn’t work like that. In just a few years your house could depreciate and be worth a lot less than what you paid. On top of that, unless you live in a hot market it takes times to sell a home – sometimes years.
What to Do Instead: Consider whether you’d be better off buying a house or renting. If you decide to buy stay well below the amount you got preapproved for. You should also keep a large emergency fund to cover all of the expensive surprises that come a long with being a homeowner.
The Keeping Up Appearances Trap
Let’s talk clothes.
When you land your first professional job you need to look the part. One trip to the mall to pick up a few work outfits could end up as a thousand dollars’ worth of credit card debt. Your next trip to keep up appearances will tack another thousand to your already high bill. (Then you can factor in that super high interest rate that notoriously comes with credit cards.)
What to Do Instead: While you do need to look professional for your job that doesn’t mean you need to break the bank. Set a clothing budget and then buy classic pieces that you can mix and match.
The Traveling Trap
Last, but certainly not least is the vacation trap.
You browse through your Facebook feed and see all the exotic photos posted by your friends and family. “YOLO” you say and decide to max out your credit card so you, too, can have some awesome pictures to post.
But the thing is, you’re probably not financially ready to be taking these sort of the trips. And will traveling really feel great when it comes with such debt?
What to Do Instead: If you can’t afford to pay cash for your vacations you don’t need to go. Instead start a vacation fund and put a certain amount of money in it every time you get paid. When you have enough cash to cover the cost of a trip then you can go enjoy the fruits of your labor.
Being Smart Now Will Save You Later
Being smart with money now will save you a ton of stress later. Consumer debt will get you nowhere in life. If you find yourself spending just to impress a certain group of friends I’d suggest you get a new set of friends.
If you can avoid these common debt traps your future self will look back and thank you kindly!
Robert Farrington is America’s Millennial Money Expert. He teaches young adults how to escape student loan debt and start building real wealth at The College Investor.
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