When unexpected expenses come up, it’s all too easy to turn to credit cards to cover them — and for many consumers, that is often what starts the downward spiral of mounting credit card debt.
The best way to guard against such unexpected expenses is to set up an emergency fund and save for a rainy day. But for many people, the battle to make ends meet and stay out of credit card debt is ongoing — and in such situations, emergency expenses are rarely the main cause.
Here are the three most common budget busters that lead consumers into debt — and how to avoid them.
Budget buster #1: Periodic expenses
You’ve created a budget and are doing a great job at staying within your spending limit for groceries, household purchases, transportation, entertainment and so on. And then, suddenly, a bill arrives for the annual auto registration, and you’re back in the red.
“Periodic expenses are a critical part of the budget, but many people forget that,” says Kim McGrigg, manager of community and media relations at Money Management International, a leading nonprofit credit counseling agency. “Again and again, people tell me that they were doing great at staying within budget, until they had to pay their taxes, their car registration, their insurance, summer vacation or whatever.”
McGrigg says that many consumers mistake certain types of periodic expenses for emergencies. For example, a refrigerator needing to be replaced or routine car repairs might seem like an emergency, but they are normal, predictable events that consumers need to plan for.
“I always tell people to assume that something will need to be repaired during the year,” says McGrigg. “While a car accident definitely is an emergency, things like needing new tires or occasional repairs are not.”
How to avoid this budget buster: McGrigg recommends that people make a list of all their periodic expenses that are not paid on a regular monthly basis. These include vacations and holiday expenses, back-to-school expenses, property taxes and other taxes, auto registrations, insurance payments and so on. Be sure to include an estimate for maintenance expenses that occur from time to time — including car repairs, appliances needing to be replaced, household maintenance and so on.
Based on that list, determine the total annual amount for periodic expenses. Divide the total by 12 to get the amount that needs to be put aside each month to cover these expenses as they come up. McGrigg recommends setting up an automatic bank transfer of that amount into a dedicated savings account each month so that the money is no longer available to spend.
Budget buster #2: Comfort shopping
You’ve heard of comfort foods and comfort eating, but what about comfort shopping? Well, comfort foods may be part of a larger tendency that we humans have: To cheer ourselves up when feeling down, we often try to reward ourselves. And, undeniably, shopping is right up there with chocolate and ice cream as a great pick-me-up — without the calories!
An occasional shopping spree can be okay — if you’ve budgeted for it. However, if you feel like hitting the mall whenever you’ve had a bad day at work or just need a break from the stresses and frustrations of life, comfort shopping can quickly turn into more of a problem than a cure.
How to avoid this budget buster: To avoid those bloated credit card bills at the end of the month, take an honest look at your spending habits. If your way of dealing with life’s frustrations is sabotaging your financial wellness, it may be time to retool your problem-solving habits. Otherwise, you could find yourself with a much bigger set of problems down the road.
At its most extreme, comfort shopping can turn into compulsive spending. For people struggling with an outright shopping addiction, McGrigg recommends seeking professional help from an organization like Debtors Anonymous.
Budget buster #3: Following the wrong money script
How we intend to spend our money and how we actually spend it are often two different things. In a survey by Money magazine, 94 percent of respondents said they planned to make lasting changes to how they handle their money due to the recession. However, history tells another story.
“Most people are conditioned to follow certain money scripts, and they don’t even realize it,” says Stacy Tisdale, a financial journalist and co-author of “The True Cost of Happiness.” “So people tend to fall back into their old habits, as soon as their finances improve.”
According to Tisdale, the way we spend our money is typically governed by beliefs and attitudes we may not be aware of. These include the lessons we learned as children. How we saw money handled when we were young tends to be how we handle it when we grow up. The influences from society and the media also impact our attitudes; we are constantly bombarded with ads and marketing messages that would have us believe that success (and our value as human beings) is measured by the car we drive or the clothes we wear.
“When people have issues with money, they go straight to the numbers, but the real cause of that financial experience has nothing to do with money,” says Tisdale. “It’s much more about our learned beliefs and the influencing factors can blind us to our true values, and prevent us from making the best decisions in regards to our finances.”
How to avoid this budget buster: Tisdale recommends creating a new money script based on what your real goals and values are. Take the time to think about the five main goals you would like to achieve over the next year, and write them down. Then, for each, figure out what you need to do and what sacrifices need to be made to achieve those goals.
“Being very clear on your goals will help you change your attitude and make you more conscious about the implications of purchase decisions,” says Tisdale. “Each time you want to buy something, ask yourself whether you can afford it and if it’s in line with your goals. If not, you need to ask yourself why you’re purchasing it.”
Tisdale gives the example of one year when she wanted to save for a trip to Paris. “I put a picture of the Eiffel tower in my wallet next to where my credit card is,” she recalls. “That made a huge difference.”