Financial Situations You Don't Want to Find Yourself In

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Managing your finances can seem like a challenge in today’s economic climate. With inflationary pressures, trade wars and high utility costs continuing to impact people's everyday lives across the country, there’s little room for error. Yet, many people find themselves in financially vulnerable situations due to poor money management.

You make financial choices every day, from shopping for weekly groceries to borrowing credit to managing short-term expenses. While some of these decisions can be managed with proper planning and effective budgeting strategies, others can prove costly.

This is especially true when it comes to borrowing credit. Although the rise of fintech has made borrowing more accessible and inclusive, choosing the wrong type of credit can be detrimental to your financial health. Instead, consider exploring safer borrowing options, such as alternatives to payday loans, which have manageable repayment terms and offer a better path toward financial stability.

In this article, we discuss a few financial situations best avoided and what you can do instead to manage your finances better.

1. Not Tracking Your Expenses

Finances are one area in life where you can’t afford to fly blind. If you’re not using a budget to track expenses or set financial goals, you could end up overspending and not saving much for an emergency. 

An effective and realistically set budget can help you track your expenses while saving a few pounds in the process. These savings can serve as a buffer during a financial emergency or come in handy during an economic downturn. So start budgeting today because every penny counts.

2. Not Building Your Credit Score

If you know a thing or two about borrowing credit, you know how important it is to have a good credit score. While it may be difficult to have a good credit score in this economy, there’s no harm in trying to build it up. This is especially relevant if you’re someone who has a bad credit history or a thin credit file. 

You can use a credit builder loan to slowly build up your credit score. These are specifically designed for this purpose and can be used in combination with an effective budget to boost your credit score. A good credit score can help you access better and more affordable credit options at lower interest rates. 

3. Having Only One Income Source

Relying on a single income source in a sluggish economy isn’t a wise idea. It limits you financially and can leave you vulnerable to a potential loss of income due to various factors. Consider taking up a side hustle or a gig to strengthen your financial position and generate passive income.

Having more than one income source can give you more breathing room financially. With more savings, you can invest in your personal growth or upgrade your professional skills. Taking up a side hustle also keeps you productively engaged while allowing you the opportunity to learn new skills and make new connections.

4. Living Paycheck to Paycheck

Living paycheck to paycheck is a financial situation many have been through at some point. However, for some people, this is a financial pattern that can easily trap them in a cycle of debt, especially if they’re relying on borrowing credit options like short-term loans or payday loans.

This can lead to much financial stress as short-term credit options come with proportionately short repayment periods and high interest rates. Instead, consider effective budgeting strategies to save a few pounds each month by prioritising essential expenses. This can free up some money for your savings and can help you manage without relying on credit when you hit a rough patch.

5. Co-signing Loans without Understanding Loan Terms

Co-signing a loan for your family member or a friend can seem like a wonderful gesture of support when they’re struggling. However, not understanding the full implications of such a loan arrangement can burden you financially. This is because co-signing a loan can make you liable to pay the full balance if your family member or friend defaults on the payment.

From a lender’s perspective, you are as responsible for making this payment as the one who took out the loan. Not just that, but this loan would also appear on your credit file. This can negatively affect your credit score and potentially raise your debt-to-income ratio. Before you co-sign a loan, ensure you understand what you’re signing up for or consider other safer credit options like a guarantor loan.

Conclusion 

Slipping into a money trap can be easy when you’re not mindful of your expenses or don’t have financially healthy habits in place. If you find yourself struggling with finances or falling into challenging situations, consider pausing to review your decisions.

More often than not, you can manage your finances better with a few smart budgeting tricks. It also helps if you cultivate better financial habits, like saving for an emergency fund, borrowing low-cost credit options and prioritising essential expenses. By doing this, you can avoid financially tricky situations and be at peace.