The Most Common Financial Problems and How to Avoid Them

Money troubles can put massive stress on you and your relationships. Fortunately, many of these financial problems are avoidable, or you can at least mitigate their impact by taking specific steps and careful financial planning. 

Below, we'll cover some of the common financial problems people find themselves in today and how to avoid them or lessen their effect on your life. 

Living above your means

A budget is a roadmap to your financial life. Without one, you may lose your way and get into serious financial issues because you're living beyond your means. 

Despite the importance of budgeting and living below your means,  65% of people have no idea how much they spent last month, indicating they don't have a firm budget in place, which can lead to financial problems.

Creating a fixed monthly budget gives you an overhead view of cash flow in and out. It also ensures you’re in good financial health, have your bills covered and have enough money left over to save. 

There is no shortage of budgets to follow, including the 50/30/20 budget, the envelope budget, the zero-based budget and many more. Use the one that best suits your lifestyle to keep your financial life in order. 

When creating your budget, be prepared to trim expenses to get your cash outflow below your inflow. At this point, you're living below your means and can start saving money. 

Job loss

A huge issue throughout the coronavirus pandemic and many other financial crises was job loss. Millions of Americans lost their jobs, many dealt with pay cuts and others fought job insecurity. 

Preparing for a potential job loss is critical to avoiding money problems if the unthinkable happens.

Here are some tips to keep you prepared for potential job loss. 

Avoiding credit card debt with an emergency fund

Credit cards can be helpful tools, as they provide financial flexibility and offer great rewards points in return. But, they can also become a financial crutch, as many people turn to them when they lose their job, creating more financial problems than they solve. 

This can turn what could be a short-term emergency into a long-term financial burden due to the high interest rates of credit cards and minimum payments designed to keep you in debt as long as possible.

Let's say your monthly expenses are $4,000, and you're out of work for two months. If you turned to your credit cards, you'd rack up $8,000 in debt. 

Using a credit card with 19% interest and a 4% minimum payment, your minimum payment would be $320 per month. At just the minimum payment, it'd take you 157 months to pay off the debt, and you'd pay $5,101.78 in interest. 

You can avoid this racking up credit card debt by tucking aside 20% of your monthly income into an emergency fund until you've saved at least three to six months of living expenses. If you can't afford to save 20%, just save as much as you can until you reach the three- to six-month goal. 

This emergency fund will help you avoid reaching for a credit card every time a problem arises. 

Take on a side hustle

In today's gig economy, it's simple to get a side hustle and make a little extra cash. You can monetize a hobby, perform on-demand odd jobs or become a freelancer in your industry of expertise. 

With a side hustle, you're mitigating the dangers of job loss, as you can convert your side hustle into a full-time gig if you lose your job to make ends meet and get through the temporary financial difficulty. 

Ignoring your credit and credit score

While you want to avoid most debt, some debt can be helpful, such as a mortgage or a car loan. These debts give you access to the cash you need to make larger purchases. In the case of a mortgage, you’ll grow your net worth via property ownership. 

If you don't monitor your credit history and credit score, you won't know if you can get one of these loans until you apply. Then, you could be unpleasantly surprised by a rejection due to a poor credit score or an unknown negative mark on your credit report. 

You can avoid this financial problem by signing up for a free credit score site, such as Credit Karma or Credit Sesame. These sites will give you an estimated credit score and allow you to keep an eye on your credit report. 

Alternatively, you can also get your free credit score and report from any of the three credit bureaus, or you can sign up for TransUnion or Equifax's credit report services. The latter two give you full access to all three credit bureaus' reports, but they come with monthly fees. 

Keep in mind that the free credit monitoring sites provide estimated scores only. Your actual scores will vary, but they at least give you an idea of where your score is. More importantly, you can see any potential red flags on your credit report and take care of them before they become problems. 

Impulsive spending

Impulse spending is a big financial challenge for Americans. On average, this common financial problem costs us $2,196 per year. That's cash you could add to an emergency fund or invest into your retirement to ease future financial anxiety. 

This spending habit is controllable with a few targeted strategies:

• Let yourself spend. Yes, let yourself spend, but do so within reason. Create a “fun money” category within your budget that allows you to impulse spend in a way that fits your financial situation. Want that new pair of sunglasses? Check the fun budget first.

• Delay gratification. See an item you want? Set it back on the shelf and think about it for a day or two. If you don't remember the item after a few days, it likely wasn't something meaningful anyways. 

• Shop with a list. Whether you're shopping for — groceries, holiday gifts or clothing — always do so with a list. Having a list allows you to simply put your head down and get what you need instead of browsing and possibly overspending because there's a great sale on televisions.

• Bring a shopping buddy. Bring a friend or family member with you to go shopping, and let this person be the buffer between you and all the impulse spends you want to make. Explain to your buddy that you'd like them to help keep you on the task at hand of buying the items on your list. 

• Ignore the Joneses. Keeping up with the Joneses — buying more expensive items just because your neighbors did — is a quick way to get into the area of impulse spending. Ignore the neighbor's huge purchases and live within your means. If your neighbors do get something that you really want, save for it. When you have the money saved, you may realize how little you wanted that item and use the savings on something more productive. 

Carrying excessive debt

Debt can put a massive strain on your personal finances, especially high-interest credit card debt. Sure, you can make the minimum payments, which are generally relatively low, but you'll likely spend a while paying off your debt and incur huge amounts of interest. 

For example, the average American has $5,313 in credit card debt. Let's say this debt is spread across multiple credit cards with an average interest rate of 15% and a 4% minimum payment amount. 

At these amounts, you'd pay $212.48 per month as a minimum payment, and it'd take you 140 months to pay it off at that pace. Plus, you'd pay $3,340.73 in interest fees over this period. 

Fortunately, you can take control of your finances and manage this financial problem with two surefire techniques: the debt avalanche and debt snowball. 

Debt avalanche

With the debt avalanche payment plan, you focus all your extra funds toward your creditor with the highest interest rate while making the minimum payments on all your other debts. 

Once you pay off that debt, you focus all your extra funds on the debt with the next highest interest rate while continuing to make the minimum payments on your other debts. 

Continue this process until you've paid off all your debts. 

The benefit of the debt avalanche is that it focuses on interest rates, potentially saving you tons of cash on interest charges. On the flip side, it may take a while to pay off that first debt, so you can't rely on quick payoffs to keep you motivated early in the process. 

Debt snowball

In the debt snowball payment plan, focus all your extra money on the debt with the lowest balance while making the minimum payments on all your other debts. 

Once you pay off the lowest balance debt, you focus all your extra money on the debt with the next lowest balance and make the minimum payments on all your other debts. 

Repeat this process until you've paid off all your debts. 

The benefit to the debt snowball is the quick payoffs in the early stages can help keep you motivated. The downside is since you're focusing on the lowest balances, you can incur interest charges from your higher-balance and higher-interest debts. 

Starting retirement savings too late

Some people have access to great retirement plans, like 401(k) plans at work with employer matches, but they fail to see the value in saving now for their future. They may look at their budget, see they can only afford to save $100 per month, and decide that's not enough. 

However, if you saved $100 per month with a 100% employer match starting at age 21, you'd have more than $166,000 in a 401(k) when you reach 67 at a 10% rate of return. Sure, that's not enough to retire on, but you will likely see pay increases over the years that you can add to your savings rate and build a larger nest egg. 

The key to successful and stress-free retirement savings is to save money as soon as possible. This’ll help reduce financial stress and increase financial security when it matters most: in your golden years of retirement. 

Here are some ways to start investing in your retirement early and put this financial problem behind you. 

Employer-sponsored 401(k)

In the U.S., 56% of employers offer a 401(k) retirement plan for their employees, and 51% of those offer an employer match. The employer match is when your employer will match a percentage of your 401(k) contributions up to a set percentage of your salary. 

For example, a common 401(k) match is 100% of contributions up to 4% of your salary. This means if you earn $100,000 per year and contribute $4,000 per year to your 401(k), your employer will also contribute $4,000 to your 401(k). 

This is free money for the taking. 

Your initial retirement savings goal should be to maximize this match. If you can't do it immediately, just invest as much as you can afford into your 401(k) initially, then with each pay increase, bump up your 401(k) contributions until you reach this max. 

After you've maximized the matching, continue increasing your contributions with each pay increase until you reach the IRS limit on yearly contributions. As of 2021, this contribution cap is $19,500, or $26,000 for those over 50 years old. 

A 401(k) benefit is the contributions are taken before taxes, reducing your tax burden today. Your 401(k) can also grow tax-free. The IRS taxes your 401(k) as income only when you start making withdrawals. 

Many employers make it simple to sign up for a 401(k) each year. So, reach out to your benefits department to find out when the next enrollment period is. 

Roth individual retirement account

A Roth individual retirement account (IRA) is similar to a 401(k), but you run it instead of your employer. With a Roth IRA, you make your contributions after taxes. This means there are no immediate tax benefits, but a Roth IRA grows tax-free and you can make qualified withdrawals tax-free. 

Plus, you can withdraw any portion of your principal contributions — your contributions before interest is paid — tax-free. So, if you need to tap into your Roth IRA for any reason, you can access some of the money without paying any penalties. 

Like a 401(k), a Roth IRA has contribution limits. As of 2021, this limit is $6,000, or $7,000 if you're over age 50. 

You can easily sign up for a Roth IRA online through many banks. 

Put your financial problems behind you

Everyone runs into financial problems in life, so there's no need to feel bad for running into your own problems. The key is to face them and move forward toward a more secure financial situation. 

From creating a budget that allows you to live beneath your means to taking on a side hustle to saving as early as possible for retirement, you can easily avoid some significant financial problems. 

If debt is one of the financial problems you're struggling with, the Tally† credit card payoff app can help. This app rolls all your credit card payments into just one monthly payment. Plus, it offers a lower-interest personal line of credit. This allows you to efficiently pay off higher-interest credit cards and save money along the way.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.