4 | Money Traps

Savings Account

A bank account where you can put your money to save it for future expenses.

Overdraft

An amount of money that you are allowed to take out of your bank account that is greater than the amount you deposited. Interest and fees are usually charged on the money that is borrowed.

Line of Credit

A type of loan, usually from a bank. It is usually set up like a bank account that can be easily accessed when money is needed. Interest is charged on money borrowed from this account.

Loan

An agreement to use money that belongs to someone else and pay it back at a later date.

Interest

Extra money paid to someone else when you borrow money or money that may be paid to you when you have invested money.

Income

The amount of money a person has coming in to their household.

Expenses

Items that money is spent on, such as rent, food, bus fare and clothing.

Credit Card

A card that represents a credit agreement. A bank or financial institution may give a credit card that can be used to pay for goods or services before the money is actually deposited in the account. The credit card owner agrees to pay back the borrowed money at a designated time. If full payment is not made on the payment date, interest will usually be charged.

Credit

Money that a bank, business, or person allows someone else to use and then pay back in the future.

Consumer

A person who buys goods or services.

Chequing Account

An account you set up at the bank that allows you to transfer money to other people using cheques.

 Objective

In this section, we look at some of the pitfalls and traps we can fall into with our money. Sometimes, we fall into these traps because we find ourselves needing some cash quickly or because our earnings don’t quite match our spending habits. In this section, we address common money traps and how to avoid them. We also discuss the following concepts:

  • How short-term loans really work.
  • How to know if a short-term loan is really the right answer.
  • How spending habits can contribute to decreased cash flow.

Financially fit people manage financial surprises because they’ve trained for these situations by saving and planning.

Short-term Loans or “Loans till Payday”

Wouldn’t it be nice if money grew on trees? Then, whenever we needed some cash, we could just get it from the money tree. Although some businesses would like you to believe this is possible, money trees, unfortunately, don’t exist.

People sometimes find themselves in a situation where they need some cash quickly. Perhaps they need to pay for an unexpected expense such as a car repair or medical bill or they may need more cash quickly because of poor planning or spending more money than they made in income. One way people may choose to get some quick cash is by getting a short-term loan or “payday loan.” However, these types of loans can be a very high risk and an expensive way to get money.

The types of businesses who offer these short-term loans are usually private companies that charge not only very high interest rates but also additional service and lending fees. When you add up all these additional costs, you can be making a costly decision. Before you agree to or sign for this type of loan, be sure you read the contract carefully and that you understand all the fees being charged and what penalties apply if you cannot repay the loan at the agreed upon time.

Although short-term loan companies offer the convenience of quick cash, you have to ask yourself “is it really worth it?” To compare the cost of a payday loan to other loan sources such as a short-term cash advance on a credit card or line of credit, read this handbook sponsored by the Financial Consumer Agency of Canada: The Cost of Payday Loans. (You can download it from here).

Is a Short-term Loan the Answer?

Before you agree to a short-term loan, ask yourself “How badly do I need this cash?” Most short-term loans are based on a 14-day lending period. When considering this type of loan, you need to consider what the cost will be to you for a short-term gain.

Businesses that offer these kinds of loans are in business to make money and, if you don’t repay your loan on time, they can charge interest rates of up to 600% per year. If you compare this to a cash advance on a credit card, which could be around 19% per year, or a line of credit loan from your bank, which may be as low as 3% per year, you can see that you are paying a whole lot more for the convenience of a short-term loan. Before deciding to get a short-term loan, ask yourself the following questions:

Although short-term loan companies offer the convenience of quick cash, you have to ask yourself “is it really worth it?”
  • Do I really need the money right now?
  • Have I exhausted all other sources for getting the money?
  • How much is this loan really going to cost me?
  • Am I sure I will have the money to repay it on the due date?

Ideally, you would have money saved to cover unexpected expenses and emergency situations. No one likes to think about having to deal with an emergency, but if you plan ahead and have a safety net in place, you could save a lot of money in the long run. Talk to your bank about setting up a back-up plan, whether it’s an overdraft on your chequing account, a credit card that you can use in an emergency, or a line of credit that you can access when needed. But remember, like all aspects of financial planning, you have to show restraint and only use the back up plans when all else has failed and it’s your last resort. Also be sure you pay back the money you borrow as soon as possible.

If you find yourself in a situation where you need a short-term loan, you may need to consider how you got there.

How Did I Get Here? Do My Spending Habits Match My Income?

It’s easy to fall into the trap of just spending without thinking about the consequences. Sometimes our spending becomes a habit that’s hard to break or we might be trying to keep up appearances or impress someone. Maybe we have to support someone else or we just can’t say no when someone asks for something. Whatever the case may be, it can take a lot of work to keep your spending habits under control.

The first step to controlling your spending is to be aware of what you are spending your money on. Most people don’t realize how much they spend on the little things—a coffee here, a movie there, a couple bucks for an ice cream or magazine. All these little purchases add up and can put you in a position where your spending far exceeds your income.

Some people believe it will all work out in the end—perhaps they will get a windfall, inherit some money, or find a new job—or that everyone has some debt in their life and it’s nothing to worry about. But if you don’t face the reality of your spending and make a plan that actually fits your current income, you could find yourself facing some serious consequences.

Being financially fit is not always easy. It requires making some hard decisions, showing restraint with your spending, and understanding how the financial system works when it comes to borrowing money. When you make the effort, you will start seeing the benefit and rewards of being in control of your financial future.

Take the next step:  5 | Budget

 Learning Resources

To get the real scoop on short-term (payday) loans, check out these Websites:

The Cost of Payday Loans

Payday Loans Explained

Before You Sign Any Contract: 10 Things You Need to Know

 Tips Just for You…

Teens

Here are a few tips to get started being financially fit:

Practice smart financial planning now.

Practice using a budget – even if it’s just for your allowance.

Put a little money away for a rainy day.

Start a savings account, even if you save just a little bit every month.

Family

Plan Ahead! It’s easy to put off financial planning because it seems like such a huge task. But if you set small achievable goals for yourself and do a little bit each day, the benefits will pay off and you will feel good about being in control of your finances.

Budgeting is the key. Remember it doesn’t have to be perfect. Each month you continue working on and adjusting your budget makes the task easier and easier.

Take the next step:  5 | Budget

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