4 Financial Black Holes to Avoid

A black hole, according to Wikipedia, is “a region of spacetime from which nothing, not even light can escape.” It is called “black” because it absorbs all the light which hits the horizon. Financially speaking, beware of these four black holes which will absorb your money and never, ever give it back: 1. Credit card debt If you ever carry a balance on your credit card, you are throwing those interest payments into a black hole. According to creditcards.com, the average American family has $15,800 of credit card debt . Assuming an APR of 14.99%, that black hole is absorbing $2,368 of Mr. Average Family’s money every year. 2. Rent to own When you pay rent to eventually own something (instead of saving the money in order to buy that item outright) you are feeding the black hole. For example, if you opt for the Toshiba 40” LCD TV at Rent a Center, you will be paying $19.99 a week for 78 weeks — a total of $1559.22. The very same TV is advertised on Toshiba’s web site for MSRP of $549.99. So…here’s the deal: If you can afford $19.99 a week rent, you can afford to set aside that same $19.99 for 28 weeks in order to buy the TV outright. Your impatience is costing you $1,000 … sounds like a black hole to me. 3. Financing a new car New cars are black hole items, not only because of the high depreciation rate, but also because of the interest paid on borrowed money. Of course used cars also depreciate, but at much lower rates. The way to minimize that black hole money is to plan for the less depreciation while paying cash for the vehicle. I realize that new versus used is not comparing apples to apples, but stick with me. Research found at Edmonds.com indicates that new cars will lose 60% of their value in the first five years of ownership. A $30,000 car, therefore, will be worth $12,000 in five years — a depreciation of $18,000. If this car is financed at 8% for five years, the buyer has also paid $6,500 in finance charges. Total black hole money for those five years? $24,500. If one bought the five year old vehicle instead of the new one, assuming 40% depreciation over the next five years and zero finance charges, total black hole expenses come to $4,800. Again, we are not comparing apples to apples, just comparing black hole money of new versus used: about $20,000 more for the new car, or $333 a month. If you have $333 every month to pitch into a black hole for the privilege of driving a new car , go for it. Otherwise, you might consider a used car . New $30,000 car (8% APR) Five year old $12,000 car (paying cash) Five year depreciation $18,000 $4,800 Five year finance charges $6,500 0 Total black hole money $24,500 $4,800 4. Long term use of storage units I have been amazed by the proliferation of storage units in our rural Southern Illinois community. These units make sense for a family who is relocating and needs temporary storage, but, because ours is a very non-transient community, I assume the vast majority of these units are being used for long term storage. Doing so is throwing money into a black hole. Why? Because storing stuff just to be storing it is pointless. They either need to find a use for it, give it away or sell it. Finding some common black hole traits In case you didn’t notice, the common thread of the first three black holes is impatience.  Instead of taking the time to save up for a purchase, the consumer succumbs to the “have it now” mentality.  Interestingly, our fourth black hole is a logical consequence of this impatience: people buy so much stuff that they have to pay to store it. We live in a crazy world … a world where black holes abound. Readers: Have any of these black holes devoured your money? What other black holes should we be avoiding? Image by  sdecoret / Shutterstock Related Articles: Saving money with your car Money Mistake #3 – Not paying attention to interest rates How to get a free $100 gift card in under an hour Save money on car depreciation 5 Ways to Kill Your Financial Progress (And How to Get Ahead) Walmart’s Pre-Black Friday Sale and Deals 2010 6 steps to reducing your credit card interest rates Joe Plemon, a retired engineer, financial counselor and blogger, lives in Southern Illinois with Janice, his wife of 40 years. Joe likes online Scrabble, St Louis Cardinal baseball, blues music, power naps, high school football, short term mission trips and Sunday family dinners. You can read more from Joe at Personal Finance by the Book . The articles on this site are for entertainment purposes and should not be taken as financial advice. Please contact a financial professional for specific advice regarding your situation. Also, many of the CPF articles help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others. Find out more here .

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4 Financial Black Holes to Avoid

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