You don’t have savings or credit card (otherwise, you wouldn’t be thinking about a payday loan).  You’re pretty much living paycheck to paycheck.  Then, you have an unexpected expense.  Since you don’t have anywhere else to turn for quick cash, you opt for a payday loan.  Naturally, the situation hasn’t improved since you first took out the loan and you can’t afford to repay it, so you pay a fee to have it extended.  Then you do it again.  And again. 

State laws prevent you from rolling the loan over too many times, so you take out another payday loan to repay the first.  Within a few months you owe at least $1,000 in payday loans and fees.

Payday loans and cash advances only make a bad situation worse.  Even legislators who voted on payday loans now regret passing those laws.  In several states, like Georgia, laws are being passed to cap the interest rates on payday loans, keeping them in the double digits, at least.

What can you do when you’re in a bind and need cash fast?  Start by preparing for that type of situation.  If you’re reading this and you’re doing ok financially, start building an emergency fund.  Pay down your credit card balances so you have some available credit.  See this article I wrote for About.com Credit/Debt Management “15 Payday Loan Alternatives” more more ways to deal with a financial bind.

By all means you should enjoy your raise, but spending it on consumable goods, isn’t the wisest thing.  If you’re already living comfortably, it’s actually stupid to just spend the money.  You’ll unnecessarily inflate your standard of living making it nearly impossible to realize you’ve gotten a raise.

Dumb things to do with a raise

• Buy a new car, especially a larger, gas-guzzling one
• Go on an extra vacation
• Buy more expensive clothes
• Hide it under your mattress
• Spend it before it shows up in your paycheck

Smart things to do with a raise

Pay Off Debt

When you get extra money, put it toward your debt, especially high interest credit cards and loans.  Stretching out your payments means you pay more interest to the banks than you would if you’d paid the debt sooner.  Paying off debt sooner rather than later saves you money in the long run.

Invest and Save

It only makes sense to put your money toward something that will make more money, rather than something that will only cost more money.  Put your raise in a high-yield investment or savings account.  Let’s say your raise gives you an extra $250 a month and you put it into an investment that gives you 7% a year.  After 5 years, you’d have $21,477.  If you spent that money, after 5 years, you’d have $0.