6 slow ways you drain your wealth
When we focus our attention on the tiny leaks in our financial lives, we face an important truth: Little things add up.
This post comes from Kentin Waits at partner blog Wise Bread.
Financial woes can come quickly from big events like foreclosure, loss of a job or health problems. These misfortunes, though painful, make a certain amount of sense. Clearly A caused B and led to C -- however just or unjust A, B or C may seem.
But at other times, our finances suffer death by a thousand cuts, and we can't make ends meet or get ahead. We work, pay our bills and live modest lives. Still, something is amiss.
Somewhere in the complex system of our financial lives, resources are being drained dollar by dollar. If your otherwise healthy relationship with money still leaves you coming up short, maybe you have a secret slow financial bleed. (See "Emergency plan: Better than an emergency fund" for more on proper planning.)
Here are six of the most common causes:
Interest on consumer debt
Interest is often more like a gusher than a slow bleed. I mention it only because paying interest is so accepted and expected that we often don't realize how much it can drain our wealth. Paying interest on everything from cars to cheeseburgers is insidious, and if left unchecked, it saps our resources and demands more and more of our budgets. Which things are you paying interest on? Were they wants or needs? Are the items appreciating in value, or depreciating? (Post continues below video.)
Service charges and late fees
We live in a world that's bent on collecting your nickels and dimes. It happens when we pay a bill over the phone and incur a convenience fee, when we return a DVD and pay a late fee, when we need to speak to a customer service representative and get charged a service fee, when we bounce a check and have to cover an overdraft fee. Unnecessary fees bleed our cash, and while some are unavoidable, others aren't. Defend your dimes and dollars and wage war on all fees within your control.
Interest lost is income lost. Take a look at your savings accounts, and your 401k and IRA investments. Do you know what your average rate of return is? Is your money working as hard for you as you worked for it? While being mindful of your personal comfort level with risk, explore ways to boost the return on your money.
Consumers have more power than they realize, and there are ways to score better deals on cable, cellphone plans and other services if you're courageous enough to push the envelope a little. Make a few calls to your service providers and let them know you're shopping around for a better deal. You'll be surprised how quickly those airtight contracts get a bit more breathing room.
Unused health club memberships are the monthly equivalent of using an exercise bike as a coat rack. We join a gym (usually around Jan. 1 of any given year) with the best of intentions. Then we start the long journey of forking over $60 a month until we come to our senses and somehow manage to wriggle out of the contract. Do you have a membership that you're paying for and don't use? Add up how much it's costing you per year (include interest if you don't pay off your credit card every month). Explore selling your membership, renegotiating your dues or paying a penalty to get out of the contract.
Hyper-insurance and high insurance deductibles
Ignore this section if you're accident-prone or driving a brand-new Ferrari. Otherwise, consider this: As a product, insurance was originally designed to save folks from financial hardship and ruin. But over the past 15 to 20 years, we've begun insuring our coffee makers, cellphones and TVs. I call this phenomenon "hyper-insurance." Granted, I'm not intimately aware of your financial situation, but I doubt that a TV tragedy is going to land you on the streets. Why are we insuring every electronic bauble we own? Is the risk/expense ratio really that compelling?
Similarly, folks are deathly afraid of the high-deductible auto insurance policy. We gladly pay more for low-deductible policies and effectively buy insurance on our insurance. I know accidents can happen at any time, but take a realistic look at your driving record and accident history. Could you bump up the deductible and still be solvent in the unlikely event of a fender bender? If so, it might be worth upping the deductible and lowering your monthly insurance bill.
When we focus our attention on the tiny leaks in our financial lives, we face an important truth: Little things add up. Fees, dues, usurious interest rates, silly insurance products -- they're all born in a boardroom and survive only by our willingness to pay. Let's agree to plug the leaks, bandage the slow bleed and save some serious cash.
Have you identified leaks in your budget? What did you do to plug them?
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