One of the classic errors which a high percentage of people make is taking on financial products without a basic understanding of how they work. Decisions which are fuelled by a basic lack of knowledge of how crucially important financial decisions can be, can negatively impact your financial future. Whether it is taking out a mortgage which leads to foreclosure and the loss of ones home, or taking on a burden of debt which is liable to balloon out of control, understanding how these things work is simply not there in a lot of cases. This is why the UK is proposing financial literacy tests before financial products are issued.
Many financial decisions have to be taken earlier than ever as student loans are acquired by school leavers who simply don’t have the necessary experience to deal with the implications of debt in many cases. A classic mistake is to borrow more than is necessary with no clear idea of how the debt will be repaid. Degrees are taken which cost way out of proportion to potential earning power upon graduation thus leading to a cycle of debt which can grow out of control due to interest charges and deferments.
Unfortunately some young people have had no family example of how to make financial decisions as their own circumstances may reflect a household caught in credit card debt and struggling with being overextended. Others are now taking family errors as an example of how not to deal with finances and some young people are taking an early responsible attitude to finance and vowing never to get into credit card debt.
Mortgages signed for in haste to purchase the dream home can lead to disappointment and homelessness when foreclosure happens. Not enough emphasis is put on the wisdom of saving for a good down payment and then signing for an affordable home loan. Instead many are tempted to finance up to the limit and end up with negative equity or simply monthly repayments which stretch the budget too far.
The American way of long 30 year mortgages is sold as a good idea. Taking home equity loans against the equity in the property is encouraged, whilst this type of decision goes against all the wisdom of paying off a mortgage early to own the home outright, and does not allow for the alternative route of progressing up the home owning ladder. Many pensioners are going to still be paying off a mortgage when retired, which makes no fiscal sense at all.
Many have already lost the plot as far as credit card usage is concerned and live reliant on credit. The fees and interest they end up paying back are not understood at the outset, and people simply fail to understand that the correct way to handle credit cards is never to run a monthly balance. This of course is the result of too much easy credit which has turned many from saving backgrounds into spenders.
The culture has changed from saving up for purchases to buying on credit, thus separating the common sense approach of distinguishing want from need. This is seen across all sectors of society, from those who drive away owing a hefty amount on an auto loan for a car which has already lost value before the paperwork was signed, to those who live from day to day taking a pay day loan for a night on the town.
Financial decisions which lead to a state of permanent debt are not good decisions even if everyone else is in the same boat. The need for credit in every form has caused the over inflated importance attached to ones credit score which is now a life ruling force in many instances. Those who end up with a ruined credit reputation find more difficulties ahead with future financial dealings. The use of the credit score in so many areas of life even prevents the best use of financial management in some cases as people have to play by the Fico rules or pay the consequences.
One of the biggest decisions which can negatively impact your financial future is the initial decision not to start saving at a young age. It is crucial to have some kind of financial cover for emergencies, for house deposits, and for retirement. Instead a large number of people are too busy servicing the outstanding costs of their debt to ever put aside money for savings, which should always be a financial priority.
If the UK does go ahead and introduce financial literacy tests then perhaps America will follow suit and people will be forced to consider more closely the drawbacks of some of the decisions they are about to take. Looking back in hindsight and wishing you’d understood how making the minimum payments only on credit cards cost you not only interest but debt problems is not much use when you’ve already paid out thousands of dollars in avoidable interest charges which you will never see again.