It’s easier than ever to spend money today. You can get caught up in the spending vortex with online shopping, subscription services, and shiny gadgets. If you want to get rich, you must understand the modern money traps that can sabotage your plans.
Let’s take retail stores for example. Whenever people go into one of these stores, they can spend 30 minutes to over an hour there. Me? Within five minutes, I’m out.
What’s my secret? I’ve got a list on my phone. And, more importantly, I follow that list. I just walk in, get what I need, and leave. As a result, I don’t waste a lot of time.
Related: How to Get Rich from Nothing to Millions
It’s the same theory that applies to finance or money. It’s amazing how many modern financial traps people have laid out around you. This is why it’s so important to know how to avoid them.
That’s exactly what I’m going to talk about here.
1. Know what you’re getting into financially.
First, understand what you’re signing up for. Why? It’s easy to get sucked into some ridiculously lucrative investments these days.
For example, real estate. There are a lot of things you can do wrong, like overpaying, buying in the wrong place, using the wrong lender, or overestimating rent.
New investors often forget to budget for unexpected expenses, such as vacancies and repairs. Vacancies will still occur even in great locations. Plus, you have to stay on top of maintenance. Therefore, you should set aside 10% of your rent for vacancies and 10% to 15% for maintenance.
You can also get scammed by timeshares.
Each person pays a portion of the value and upkeep costs to stay there one to three weeks a year in timeshares. Nevertheless, Dave Ramsey says the maintenance fees are outrageous, and investors don’t get anything back.
One final example is crypto.
As noted by Chris Butsch on Money Under 30, it only took four years for a $10,000 Bitcoin investment to become $640,000. Obviously, this will make you rich.
You can also check out crypto forums. You can also 100x your investment overnight if you get in before the next crypto explodes.
In reality, $10,000 invested in Bitcoin in November 2021 would be worth $6,175.36 in February 2022.
There’s no truth to cryptocurrency values, they’re all speculation. The short- or long-term value of your investment isn’t guaranteed (or even close).
This is especially true for new or obscure “altcoins” that trade for pennies. There are a few that may blow up – but most are scams or pump-and-dump schemes – and they’re hard to spot.
Basically, make sure you know what type of financial deals you’re getting in the market, and don’t get caught up if someone shows you a partial picture.
2. Get a handle on budgeting.
Second, we’ve got to understand budgeting. How come? It turns out that 84% of Americans say they’ve sometimes exceeded their budget, according to a survey by NerdWallet.
In fairness, this is understandable since people have unfortunately made budgeting extremely complicated by using excessive tools like spreadsheets and applications. The good news? In terms of personal finance, budgeting is the simplest concept.
As such, technique number one is referred to as the 50-30-20 rule and it is called the balanced budget formula. In this case, you should have 50% for your needs, 30% for your wants, and 20% for your desires.
The majority of people, however, do not follow it. What is the main reason for this? In the beginning, you would have a difficult time doing the 50, 30 20 budget, because it’s difficult to earn.
In my first job, for example, I was paid between 20,000 and 25,000 dollars. The money I had was nonexistent at the time. This formula would have led me to deliberately fail and think that budgeting is pointless if I had followed it.
Therefore, the 50-30-20 rule makes no sense for people in the same boat.
Alternatively, you should adopt the second method, which states that if you save nothing, you should save something.
What does this mean? The meaning is very simple.
Consider a situation where you have 0% savings. Next month, what is your goal?
Simply save 1% of your salary and continue to add 1% every month. How far should you go? Ideally, you should reach 20%.
With this purpose or vision in mind, you can begin budgeting, and you will get in the habit of budgeting, making the process more effective and enjoyable.
3. Try to keep debt to a minimum.
Anyone can fall into a debt trap. As of 2022, the average consumer debt was $101,915, according to Experian. In 2020, consumer debt averaged $92,727, up nearly 10% from this year.
Debt obligations become a problem when your monthly payments are not able to be made due to high-interest rates or other factors.
Falling into a debt trap can be caused by a variety of factors, including:
- Overspending. Spending more than you earn will eventually require you to borrow money. As a result, you are constantly taking out new loans to pay off old ones.
- High-interest debt. High-interest debt, like credit card debt and payday loans, is difficult to repay. It’s even harder to make payments with the interest on these loans.
- Unforeseen expenses. The loss of a job or a medical emergency may also result in debt. You may need a loan if you do not have enough savings to cover these expenses.
In order to escape a debt trap, you can do a number of things. Among them are:
- Create a budget. You will be able to see where your money is going by tracking your income and expenses.
- Pay off your highest-interest debt first. In the long run, this will save you money on interest.
- Make more than the minimum payments. Whenever possible, make more than the minimum payment on your debts. You will be able to pay them off faster if you do this.
- Get help from a credit counselor. It is possible to negotiate with your creditors and create a debt repayment plan with the help of a credit counselor.
To help you avoid debt traps, here are a few additional tips:
- Borrow only what is necessary. Make sure you do not borrow money for things you do not need.
- Shop around for the best interest rates. Before taking out a loan, compare interest rates from different lenders.
- Know your loan terms and conditions. Be aware of your loan’s terms, including their interest rate and repayment period.
- Prepare a repayment plan. To repay your debt quickly, make a budget and a repayment plan.
- If you need help, get it. There are organizations, such as credit counseling agencies, that can help you if you’re having trouble repaying your debts.
4. Don’t get sucked into all the modern-day hype.
Want to become rich? Then you have to avoid modern-day mumbo jumbo.
What does that mean? Well, the following two examples should help.
It is very likely that many of us have heard of buy now, pay later. It’s basically when you don’t have enough money to buy everything now and you figure out a way to pay later. In other words, buy now, pay later allows you to make payments for purchases over time rather than upfront.
Regardless, it’s a new way of getting you to spend more money.
The problem is twofold. In the first place, carrying a credit card balance forward means accruing interest. Secondly, you can damage your credit score if you fall behind on payments.
Another innovation that has emerged recently is called SNBL, aka save now, buy later. This is another variant of it buy now, pay later.
For customers who want to save for their next purchase, enterprises can now offer SNBL accounts instead of asking them to take on more debt. SNBL is a short-term savings account that allows employees to save up for future purchases and receive discounts.
Essentially, there are many companies that just invent for the sake of inventing.
Here’s another example. The number of fintech startups is high.
Why’s that a problem? If you buy something, they’ll round it up and we’ll help you invest. It would be nice if that fintech tech company made money as well.
The mutual fund receives one layer of commission from you. But, there is a second layer of commission that you pay to that fintech company.
As a result, all this mumbo jumbo reduces profits. Investing in savings requires a basic understanding of finances. Then you can do it yourself. Start simple and complicate your systems gradually.
5. Make sure your emergency fund isn’t neglected.
Approximately 23% of Americans lack an emergency fund to cover things such as home repairs, medical bills, unemployment, or other unforeseen (and expensive) expenses. Additionally, 73% of Americans don’t have enough money set aside for six months.
What’s the solution? Make sure you have enough cash to cover your essential living expenses for three to six months. It may seem impossible to reach the number overnight, but it is not impossible. Set up a separate account for part of your paycheck and you’ll make steady progress.
In addition, as your earnings rise and your cost of living rises, make sure you increase the amount of money you’re putting into your emergency fund.
6. Know how commissions and profit margins work.
Next, let’s talk about commissions and profit margins.
When you’re investing, you have to understand commissions and profit margins.
Commissions are fees brokers charge to execute trades. Commissions vary depending on the broker, type of trade, and size. Brokers might charge a percentage or flat fee, like $10 per trade.
Each unit of product sold generates a profit margin for the company. Basically, it’s the difference between the selling price and the cost of goods sold divided by the selling price. In other words, if a company sells a product for $100 and it costs $50 to make, the profit margin is 50%.
There are two ways commissions and profit margins can affect your returns. The first thing commissions can do is reduce your profit. Second, profit margins affect how much a company makes, which in turn affects its stock price.
Say you invest $1,000 in a stock with a profit margin of 10%, and the price rises by 10%, you’ll make $100. In contrast, if you invest $1,000 in a stock with a 5% profit margin, and the stock price rises 10%, you’ll only make $50.
When making investment decisions, you have to consider both commissions and profit margins. Knowing how these two concepts work can help you make better investment decisions.
To understand commissions and profit margins in investing, here are some tips:
- Do your research. Understand the company’s profit margins before investing in any stock. Websites or financial statements can provide this information.
- Compare commissions. Choose a broker based on their commissions. Depending on the trade value, some brokers charge a flat fee.
- Consider your investment goals. Long-term investments may not require commissions as much as short-term investments.
You can improve your chances of building your wealth by understanding commissions and profit margins.
7. Buy older models and avoid premium services.
You can save if you buy older models and avoid premium services.
- Older models offer the following benefits. Newer models are often more expensive. As the technology is already developed, the manufacturer cannot recoup its R&D costs.
- They can be just as good as newer models. It may not be as advanced as newer models, but most people can still make do with older models.
- They’re more reliable. It’s less likely that older models will break down because they’ve been tested and refined.
Here are some reasons why premium services are bad:
- You’ll save money. Over time, premium services can add up in cost.
- It will be easier to control your spending. By avoiding premium services, you can control your spending.
- Overspending will be less likely. Using premium services can become addictive, resulting in overspending.
These tips will help you save money on electronics.
- Find the best deal. Avoid buying the first thing you see. Shop around before you buy.
- Buy used or refurbished electronics. It’s often possible to find great deals on used electronics. In many cases, they are just as good as new — and much cheaper.
- Don’t miss sales and discounts. There are many sales and discounts throughout the year. Ensure you’re on their email list so you’re notified when sales happen.
- Wait for the next generation of products to come out. Electronics often go on sale when a new generation is released. This is the ideal time to buy older models at discounted prices.
These tips will help you save on premium services:
- Use free trials. You can try premium services for free. The free trial is a great way to test out a service before you commit.
- Save money by sharing subscriptions with friends and family. You can save on multiple subscription costs this way.
- Cancel unused subscriptions. Get rid of premium services you don’t need. Over time, this will save you money.
8. Saving for retirement later than you should.
When you’re in your 20s or 30s, it’s easy to put off saving for retirement. After all, at the beginning of a career, creating a budget may seem difficult — especially when paying debt like student loans. So, you put it off. Over time, though, your priorities may shift from saving for retirement to paying for a house or childcare.
There’s one thing you need to know, saving for retirement is never easy. Still, it is necessary to do so. In fact, according to data from the US Census Bureau, 50% of women and 47% of men between 55 and 66 have no retirement savings.
However, there is a solution. When you start a new job, enroll in your employer’s 401(k). In the absence of a 401(k) from your employer, create an individual retirement account (IRA) and automate your monthly deposits. Over time, you won’t miss the extra money you get in your paycheck if you don’t get used to it.
In addition, if you start early, your earnings may generate more earnings, accelerating your savings over time as you compound your earnings.
FAQs
What are some modern money traps people should know?
People should be aware of the following modern money traps:
- Get rich quick schemes. Investing in these schemes promises easy money. The problem is, they are often scams. As a result, this can cost you an arm and a leg.
- High-pressure sales tactics. People are pressured into making a purchase they don’t need or want with these tactics.
- Hidden fees. Often, these fees are buried in the fine print. The cost of a product or service can quickly rise if they are not taken into account.
- Debt traps. Taking on too much debt or financing unaffordable things can lead to these traps.
- Lack of financial education. It’s common for people to not understand money or how to manage it. They may make poor financial decisions and end up in debt.
Is there a way to avoid modern money traps?
If you want to avoid falling into a modern money trap, you can do the following:
- Do your research. Know what you’re getting into before you make any financial decisions.
- Don’t believe get rich quick schemes. A deal that sounds too good to be true probably is.
- Don’t feel pressured to buy. Walk away if you feel pressured.
- Read the fine print. Take the time to read and understand the fine print before signing any contract.
- Learn about money. Get an understanding of how money works by improving your financial literacy.
Are there any resources to help avoid modern money traps?
You can avoid modern money traps by using the following resources:
- The Federal Trade Commission (FTC). Information about financial scams is available on the FTC’s website.
- Your state’s consumer protection agency. You can also get information about common financial scams from your state’s consumer protection agency.
- Nonprofit financial counseling agencies. You can get help managing your debt and creating a budget through these agencies.
What are some tips for getting out of a modern money trap?
You can get out of a modern money trap by doing the following:
- Create a budget. Keeping track of income and expenses will help you understand your finances.
- Pay off your highest-interest debt first. In the long run, you’ll save on interest.
- Make more than the minimum payments. Whenever possible, make more than the minimum payment on your debts. Paying them off faster will help.
- Get help from a credit counselor. You can negotiate with your creditors with the help of a credit counselor.
