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Not matter how careful you are with money, there are money traps looming for you.
From shady salesmen, to financial moves that sound like they are will save you money, there are all sorts of mistakes you can make with your money.
Here are the biggest money traps you need to look out for.
No matter how enticing the deal might sound, you are better off moving on and keeping your money.
#1. Playing the Lottery
A lot of people call the lottery a “stupid people tax”.
While this may be a little harsh, there’s a kernel of truth to it.
The likelihood of winning the lottery is extremely low.
Even though it’s nice to fantasize about it, you’re probably going to only earn a couple of bucks from your tickets.
While those who have the money likely don’t mind spending a couple of bucks here and there, those who need it shouldn’t be spending a ton on tickets or getting addicted to the potential of winning.
#2. Whole Life Insurance
There is an argument to be made for whole life insurance for the uber-wealthy to help them with tax planning. But for the majority of people, whole life insurance is a waste.
Agents pitch it as an investment and insurance product rolled into one. But they don’t tell you the extraordinary fees you are paying or the commission the agent gets from selling you the policy.
Because of the fees, you are better off buying a term life policy, which is far cheaper, and investing the difference into a low-cost index fund.
In 20 years, your investment will be miles ahead of what the whole life policy will be worth.
#3. Car Leases
Many people turn to leasing to make high-end cars more affordable. If they chose to finance, they could not make the monthly payment. But with a lease, they can.
The problem is that you turn the car back in at the end of the lease term.
In other words, you made payments every month but have nothing to show for it. When you finance a car and finish making payments, you can sell the car according to its resale value.
While you will never get back the entire amount you paid, getting something is much better than getting nothing.
#4. Buying Stupid Things
If you’re looking to become more financially responsible, impulse purchases are the first things that have to go.
Having adult money means having the freedom to spend it on whatever we want.
Not all of those products are necessarily things we’re going to use or products that are necessary.
Always consider whether or not you need something and hold off for a bit until you buy it.
If you’re truly torn, make a list of pros and cons to see if it’s worth the money.
#5. 401k Loans
When you take out a 401k loan, you rob your future self.
Many people will argue that a 401k loan is smart because you must pay the loan back, and the interest you pay on the loan is paid back to you, not a bank.
While this is true, the problem is that you are missing out on the power of compound interest while your money is out of your retirement account.
When you run a retirement planning calculator, you will see that you will have significantly less money for retirement if you take out a 401k loan compared to not taking one out.
So if you need money for a large expense, consider other options. Your future self will thank you.
#6. Delaying Saving for Retirement
Depending on how old you are, retirement can seem like a thing that you won’t have to worry about for decades.
But years can pass by in the blink of an eye.
If you’re not prepared by the time you reach a certain age, you’re setting yourself up for an extremely hard life in your golden years.
Early savings and investing allow you to take advantage of compound interest and account benefits so that you have a nice nest egg when it comes time to retire.
If you wait until you’re near the finish line, you’ll have to work longer and try to survive only on what Social Security gives you.
#7. Student Loans
Dave is also against student loans, as too many graduates end up with so much debt it negatively impacts their financial and emotional lives after college.
But like credit cards, when used wisely, they can be a wise option to help pay for college.
The key is only taking out a small amount so they don’t significantly impact your life after you graduate.
When timeshares burst onto the scene, they were a great option for people who wanted to vacation and see different parts of the world.
But over time, they have become one of the worst financial moves you can make. You are paying higher maintenance fees annually, and many resorts have more blackout dates than ever.
And that isn’t even the worst part. Some timeshares have a perpetuity clause, meaning when you pass away, the timeshare passes down to your heirs, and now they are stuck with the headaches of owning.
Do yourself a favor and run, not walk, away from any timeshare.
#9. Lifestyle Creep
More money, more problems, as the saying goes.
A lot of people think that those who make more money are comfortable, but that’s not always the case.
Those who make more money tend to encounter lifestyle creep, which happens when more money encourages you to make certain lifestyle choices that then eliminate that boost in income.
For example, those who make more think they might need to get a bigger place, drive nicer cars, and wear better clothes.
Always live below your means if you want to experience the benefits of your extra cash.
#10. Payday Loans
Payday loans are an easy way to get your hands on cash if you are in a bind. But the interest rates can quickly crush you financially. In some cases, the annual interest rate is over 100%!
So while you think you are borrowing this one time, people end up in an endless cycle of paying more and more on these loans because the interest builds so quickly.
Before you know it, you are in a much worse financial position than when you started.
Better alternatives include using a credit card with a lower interest rate or seeing if the people you owe money to will work out a payment plan with you.
#11. Buy Now Pay Later
As inflation has increased and the economy has started to stagnate, we see far more buy now, pay later options than we used to.
For those struggling, this can seem like a helpful feature that makes things much more affordable (although we’re starting to see this for basic living essentials like groceries too).
However, it’s often much more predatory than it actually seems.
Besides making it easier to spend a ton of money and delay paying on a wide range of products, you might be spending more on hidden fees and interest than you’re led to believe when you select this option at checkout.
A good rule of thumb is if you can’t afford to buy it outright, don’t buy it.
#12. Debt Consolidation Loans
Debt consolidation loans sound like a good idea on the surface. Instead of paying multiple debts every month, you roll everything into one and have a single monthly payment.
The problem is that some debt consolidation companies charge you high fees for this. Some even advise you to stop making payments so they can negotiate with your creditors to lower your overall balance.
Not making payments ruins your credit score, making it more expensive when you need to borrow money.
If you are struggling financially, contact the National Foundation for Credit Counseling, which will help you make wise decisions about getting out of debt.
#13. Credit Cards
If you follow Dave Ramsey, you know he is against using credit cards at all costs. Using them makes it easy to get into debt and ruin your finances.
As such, they appear on this list. However, I disagree, and for those who are disciplined, credit cards are an excellent way to get cashback and reduced trips using points.
The key is paying off your balance in full every month. If you can do this, credit cards are a great way to build wealth.
#14. Same as Cash Financing
Many people confuse same as cash financing as not paying interest when they borrow money.
But this is far from the truth. What happens is interest accrues over the loan period, and if you do not pay off the loan by that time, all the interest is added back.
If you are on top of your finances, you can use this option to get a zero-percent loan, assuming you pay off the balance before the loan term is up.
But if you aren’t careful, you can end up paying a lot more as many times the interest rate on these loans is higher than average.
#15. Adjustable Rate Mortgages
This type of mortgage shows up on this list because you have no control over your monthly payment, as the rate you pay can change.
This is what hurt so many people when housing went into the tank during the Great Recession.
However, as with other items on this list, there is a time and a place for adjustable rate mortgages.
For instance, if you know you will only be in a house for less than ten years, you might consider a 10/1 ARM, which has a locked-in rate for the first ten years and adjusts annually afterward.
Going this route could lower your interest rate, saving you a good amount of money.
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The good news is learning their habits is simple which means with a little effort, you too can become wealthy.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.