When purchasing a new home, most homebuyers take on the debt of a mortgage. Some new homeowners compound that debt even further by purchasing new furnishings before moving in. All those little purchases can add up fast – and then homeowners can realize they’re way over budget. This article from Maryalene LaPonsie, published by U.S. News, offers a solution for new homebuyers, and outlines other scenarios and solutions for avoiding taking on extra debt.
Unemployment, medical bills, a shopping addiction – these may all be obvious causes of debt, but they certainly aren’t the only ways people end up in the red.
Other forms of debt are more insidious. They arrive looking like a big break or a money-saving option. But instead of getting you out of your financial hole, they actually dig you in deeper.
Buying a Home
Buying or building a home can feel like permission to replace appliances, furniture and electronics.
“What’s a couple hundred here? What’s $500 there?” says Joe Heider, founder of Cirrus Wealth Management in Cleveland, of many people’s mindset when constructing a new home. “Then they realize they’re $20,000 to $30,000 over budget.”
The solution: Having a written budget for building or renovating a home is the first step to avoiding this debt trap. The second step is to stick to the budget. Also, consider whether an existing home will have expensive maintenance issues in the near future and look for a house that is move-in ready. If you don’t start a renovation project, you can’t overspend on it.
Your New Job
Your new job is supposed to be your ticket out of paycheck-to-paycheck living, but a big boost in income is often accompanied by a big boost in spending.
“When people get a new job, it looks like a limitless amount of money so they splurge on a new car or a buy a lot of clothes,” says Heider.
Cecilia Beach Brown, a certified financial planner at Lincoln Financial Securities in Annapolis, Maryland, says it’s a common trap. “When the money’s there, it’s hard to say ‘no.'” Then people lose their job or are otherwise unable to maintain their new lifestyle.
The solution: Rather than increase your spending, continue to budget based on the amount you previously earned. Then, bank the extra for retirement, travel or a big spending goal, whether that be paying cash for a car or a 20 percent down payment on a house.
A New Cellphone
You want that shiny new smartphone, and the cellphone company is happy to give it to you – provided you sign up for a two-year contract. The phone seems like a freebie, but you have, in fact, just signed up for more debt.
“Really what you’re doing is taking a loan out to pay for the phone,” says Phil Jacobson, managing director at United Capital in Rockford, Illinois. You’re not getting the phone for free; you’re financing it with your cellphone contract.
Your new phone could also cause further problems if you have an expensive data plan you can’t afford. There’s no way to cancel most cellphone contracts without paying a sizable fee.
The solution: Reconsider contracts. Many wireless providers now offer non-contract service options, and those may be a better choice. While it costs more to buy a new phone out of pocket, you might save money on a monthly plan. If you still want a new phone, look for a cheaper, refurbished one or get a used one from a trusted source.
