Dave Ramsey is a money guru, advising on spending, saving, investing, and, most of all, avoiding debt. He’s a big proponent of setting goals for your financial life and working relentlessly to achieve them. But Ramsey often notes that changing your financial situation involves changing your mindset. And that means avoiding these middle-class money traps.
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Buy Now! No Money Down!
Whether it’s a car, furniture, or another big purchase, beware of the incentive to buy something without a deposit and make all your payments over time. With these offers, you’re in over your head right from the beginning, and in the end, you’ll end up paying far more than the item is worth. You can’t afford it if you have to finance the entire item cost.
What to do instead: Save up your money until you can pay in full.
Leasing a Car
A car is one of the few purchases that most people can’t make in cash. If you can, good for you! But you’re one of the lucky few. But if you can’t, you’re better off buying a car – preferably used, to reduce costs – than to lease. When you lease, the temptation is to get the fanciest one you can, which will mean higher payments. At the end of the lease, you have to turn in the car and you have no equity to use as a trade on another car. So, you end up leasing again. And the cycle continues.
What to do instead: Buy your car, using cash if you can or the largest down payment possible.
Vacation Timeshares
Accepting that offer for a ‘free’ vacation and sitting through the timeshare presentation sounds like the best idea ever. You get two weeks at a great resort destination every year. You may even be able to swap with others who have timeshares at different locations. If ever you decide you don’t want it anymore, sell it! You can get more than you paid for it!
That’s what they want you to think. The timeshare is just another way to get people to buy things – in this case, a fancy vacation – they can’t afford. As for selling it, ask anyone you know who has tried to sell a timeshare how that worked out. All those ads on the radio for people who will help you get out of your timeshare – for a fee – are there for a reason. They’re nearly impossible to unload.
What to do instead: Take a less expensive vacation you can pay for in cash, and go where you want!
Adjustable-Rate Mortgages
When interest rates rise, adjustable-rate mortgages gain favor. These mortgages have a lower interest rate initially, but they can go up after that. The problem is, they don’t go down. Often, people who take out an adjustable-rate mortgage do so because they cannot afford the home they want with a fixed-rate mortgage (which stays the same over the life of the loan). They end up with a mortgage even higher than the fixed rate they couldn’t afford when they bought the house.
What to do instead: Get a fixed-rate mortgage, preferably for 15 years. Your budget for a house should be dictated by what you can pay for a mortgage, not the other way around.
Home Equity Lines of Credit
For most homeowners, their home is their biggest investment. It makes sense to tap it when you find yourself in a situation where you need money. Probably not. Taking out a home equity line of credit, or HELOC is akin to taking another mortgage. If you can’t pay it back, you can lose your house.
What to do instead: Determine if whatever you would do with the money from a HELOC is really necessary. If it is, find a way to pay cash for it.
Lottery Tickets
Dreaming about what you’d do with a $10 million – or even $100 million – lottery prize is fun. But dreaming is all you’ll likely ever do, as the odds of winning are stacked against you in a big way. Whether it’s a scratch ticket or a multi-million-dollar jackpot ticket, you’re far more likely to end up with nothing than anything. And if you win, it’s likely less than you paid for the ticket. Before you buy that ticket, look up how much your state lottery pays out in prizes relative to what it takes in. It’s probably about 40%, which means that, over time, you’ll win 40% of what you paid to buy the tickets. That’s a pretty poor return on investment.
What to do instead: Take that $2 a week and put it in a savings account. And leave it there.
Buy Now, Pay Later
If you shop online, you’ve probably seen it: that little icon that says you can ‘pay in four installments of X’ instead of paying it all at once. This is another version of the old concept of layaway, except that you get your item now. And most Buy Now Pay Later schemes don’t charge interest, making them appear innocuous. But they charge late fees, and if you don’t make your payment on time, you could end up paying more than you thought. And they are usually weekly installments, not monthly, so you’re paying the whole thing off within a month or so.
What to do instead: Save up one-quarter of the cost every week for a month. At that point, you can buy the item outright or, perhaps more likely, decide that you really didn’t need that Thanksgiving sweater for your dog anyway.
Credit Cards
Dave Ramsey is not a fan of credit cards, as you might expect. But in this age of online shopping, having at least one credit card is a must. That said, there are some things you can do to ensure a credit card doesn’t cost you money. Pay your entire balance in full every month. If you’re considering charging something you won’t be able to pay off, don’t do it until you can pay cash. Don’t pay an annual fee for a credit card. There are plenty that don’t charge one. Don’t be enticed by the credit card companies’ siren song of cash back or points if you get them for regular purchases that you’ll be paying off at the end of the month. But never, ever buy anything ‘for the points.’
What to do instead: Have one credit card with no annual fee that you pay off every month. No exceptions.
Student Loans
Anyone who hasn’t been living under a rock knows there’s a student loan debt crisis in the U.S. This results from the perfect storm of rising tuition costs and the increasing demand for college degrees. To counteract this, some consumers are looking for alternatives to pricey four-year colleges, which is good.
What to do instead: There are several alternatives to taking out loans to attend a four-year college. Choose a college you can afford to pay for without taking out loans. Consider a trade school, usually a shorter time commitment and much less expensive. Spend two years at a community college to complete your core requirements, then transfer to a four-year school to do the rest. Live at home and attend a nearby college without paying for room and board. Get a job with a company that offers tuition reimbursem*nt and take your college courses at night and on weekends – on the company’s dime.
All these middle-class money traps have one thing in common: they all involve taking on debt, which is a big no-no to Dave Ramsey. Avoiding them can help you achieve your financial goals and live a more satisfying life.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: 9 Middle Class Money Traps To Avoid
