Financial success isn’t a matter of the amount of money you make. It often also implies doing the right thing with your money. Too often, individuals find themselves entangled in money traps that drain their bank accounts.
Money traps come in different forms and can erode your hard-earned money. Fortunately, these money traps can be avoided. Here are ten common money traps that may hinder your financial success, along with some tips on how to prevent them.
Money Traps to Avoid for Financial Success
Relying on Payday loans
A payday loan can be a very tempting option, especially when you have drained your cash reserves and have a poor credit score. Payday loans are easy to obtain. However, the cost of payday loans is astronomically high due to the high interest rate and fees. If you fail to repay a payday loan, some payday lenders might agree to roll over at a very high fee.
You risk getting caught in a debt trap when you borrow from payday lenders. You’ll be forced to take additional payday loans to clear the old ones. This leaves you in a financial mess that prevents you from making meaningful progress in your financial journey.
The trick to avoid this money trap is to avoid temptations to take payday loans. Think before you borrow from payday lenders. It’s a good idea to consider alternative loan options from friends and traditional loans.
Falling for Get-rich-quick schemes, pyramids and ponzis
Want to build wealth? Then, you have to avoid get-rich-quick schemes. In today’s tough economic times, the temptation of get-rich-quick schemes is real, especially for people under financial constraints. It is also easy to fall for influence schemes shared through social media. And how do you recognize get-rich-quick schemes? A common feature of all get-rich schemes is the promise of substantial returns with little to no investment. Many schemes will also pressure you to recruit others to increase your earnings.
Get-rich-rich schemes occur in different forms. Some common get-rich-quick schemes include multi-level marketing, work-at-home scams, debt relief scams, false government benefits, lottery scams, certain cryptocurrency schemes, and free prizes scams. What you can expect from a get-rich-quick scheme is the loss of your money. And if you don’t lose money, you’ll only get a small return on investment after a long time.
If you’re planning to invest, conducting due diligence and seeking professional advice is crucial. Avoid deals that are too good to be true. Always look for misleading claims, unrealistic promises, and secret money-making tips. Legitimate alternatives to these schemes include investing in stocks and starting a business.
Gambling
It’s everyone’s dream to become rich. But gambling isn’t one of the ways to build wealth. Gambling is addictive and can cause you to chase bets, leading to mounting losses. Sure, the money paid for a chance to win the big lottery is not much. But the chances of winning the jackpot are near to none.
Compulsive gambling may force you to merchandize your household goods and destroy your family. Other adverse effects of gambling include loss of savings, productivity loss, employment difficulties, denial of credit, reduced opportunity to make reasonable investments, and frequent engagement in risk investments.
Related: 10 Major Financial Consequences of Gambling
Instead of gambling, use your hard-earned money to make reasonable investments such as farming, buying a stock, and starting a business. Remember, wealth is gained through patience and diligent work. You can talk to a friend, a family member, or a professional counselor if you’re addicted to gambling. Avoid using high-risk avenues such as casinos and clubs to socialize.
Impulse Buying
Impulse buying is the act of purchasing goods and services that you had not purposed to buy. As your income grows, you can find yourself buying luxurious or non-essential items at the spur of the moment. Hypermarkets exploit this behavior to boost sales. You might purchase an expensive designer handbag or watch after entering a hypermarket for entirely unexpected reasons.
The solution to impulse buying is to create a budget and always stick to it. Your budget should clearly outline your goals, income, and expenses. Track your expenses and focus on saving for your future. Consider automating your savings to avoid inadvertently allocating your income to non-essential items.
Related: How to Create a Budget in 5 Simple Steps
Desire to keep up with others
As societal pressure increases through social media, the desire to keep up with your friends or family is a genuine concern. When you’re trapped in this desire, you may purchase expensive items and live a lifestyle beyond your means. This money trap denies you the opportunity to invest, making it harder for you to build wealth.
The trick to overcoming this temptation is to plan for your financial journey. It’s also crucial to live by your budget. Don’t get caught up in a lavish apartment you can’t afford. No matter your earnings, reducing your expenses is the best approach to achieving financial freedom.
Related: Frugal Living Tips to Save More Money in 2024
Not Having Financial Goals
Lacking clear financial goals means you’ll struggle to save money. When you begin your financial journey without clear goals, you’ll likely abandon the process along the way. Having no financial goals is another way to live beyond your financial capabilities and get into a debt trap.
To avoid this money trap, set aside time to write down your financial goals – what you intend to achieve within a specific timeline. Ensure your goals are realistic, achievable, measurable, and specific.
Failure to set automated savings
A typical money trap for many people is the failure to automatic savings. Without automated savings, you might spend all your income and deny yourself the opportunity to make reasonable investments that generate wealth.
You can prevent this money trap from hurting you by setting up automated transfers from your paycheck to your savings account. The bank will automatically move the agreed portion of your paycheck into a savings account.
Related: 10 Simple Ways to Save
Neglecting An Emergency Fund
We often experience unforeseen financial emergencies – an unexpected medical emergency, loss of job, a damaged phone, and care repair. If you haven’t set up an emergency fund, you’ll be forced into debt to cover the unexpected expense.
The best strategy to avoid this money trap is to build an emergency fund. A budget can help you safely reduce expenses and direct more money to the emergency fund. Aim to set up an emergency fund with at least six months’ worth of your living expenses.
Failure to Invest Your Money
Hoarding your money and failing to invest is a common mistake that may prevent you from growing your wealth. If you fail to invest, you lose the opportunity to earn returns on your money. This money trap causes your money to lose value as it sits idle in a bank account.
To avoid this trap from harming your financial journey, it’s crucial to find investment opportunities that give you a decent return on your hard-earned money. Consult financial experts to help you make informed investment decisions.
Having a single income stream
Relying entirely on a single income stream can be a risky path. An economic downturn or unexpected job loss can disrupt your financial well-being. This money trap can limit your financial growth and ability to build wealth.
You can avoid this trap by diversifying your income sources. Explore alternative ways of generating extra income. Consider investing in stocks, starting a side hustle, or working part-time jobs. Having multiple income streams will give you greater financial freedom.
Related: Top 16 Side Hustles in Kenya
Putting your Money in One Asset
Investing your money in a single asset is another money trap that can hurt you financially. This money trap puts you at a significant risk of losing your investment when a market crash hits. Diversify your investment portfolio to prevent being caught up in this trap. Distribute your money across various investments, including stocks, bonds, and real estate.
