In the months that followed the economic collapse, many Americans saw their finances fall apart and some were forced into making decisions that led to significant credit card debt, mortgage woes and dried up savings. During periods of hardship, making all the right financial decisions can be challenging, especially for consumers who find themselves struggling to pay their bills and keep their families fed. However, as Americans are slowly getting back on the right course, working hard to avoid the mistakes that were made during the recession is essential for overcoming money-related issues.
A recent Reuters report highlighted some of the most common missteps many households continue to make, and offered guidance on the best ways to reverse course.
Carrying high debt-to-income ratios is a common mistake with long-lasting implications. Some consumers may be unaware of how much debt is too much, but there are a number of ways to tell. The simplest indicator that individuals have taken on too much short-term debt is if their credit card balances exceed their ability to pay off the amount in full each billing cycle. Carrying over credit balances results in interest charges that can make it more challenging to eliminate the obligation.
In addition to short-term debt, it’s also crucial that homebuyers avoid purchasing properties for which monthly payments would exceed what they can feasibly pay. Record low mortgage rates and strengthening home prices have prompted many renters to consider buying a home. However, taking on a large mortgage because interest rates are low can still eat into too much of their income and result in a diminished ability to save, pay off other bills or, in a worst-case scenario, fail to meet their mortgage obligations. Most experts discourage buyers from taking on a mortgage with a monthly payment that exceeds 28 percent of their take-home pay.
Don’t leave yourself open to uncertainty
Many families were making ends meet during the recession, even though their finances were strained. The problems often arose when unexpected expenses were incurred, forcing these individuals to take on debt because they did not have a safety net. Creating an emergency fund remains one of the most advised and effective ways for consumers to protect their wealth and avoid financial ruin. It’s also one of the actions that most people continue to avoid taking. Setting aside small amounts until they have a small cash cushion saved up can make a huge difference in a person’s overall financial health.