6 Good Financial Deeds that Can Backfire

By Tim Lemke on 6 July 2017 0 comments

The saying goes that no good deed goes unpunished. Perhaps there are actually some good deeds that don't backfire, but there are many financial good deeds that can come back to haunt a generous soul if they're not careful. These favors can cost you more money than you expected, or hurt your credit. Before you embark on an expedition of financial kindness, consider these examples of good deeds that can backfire.

1. Co-signing a lease or loan

You may hope to do a friend or family member a favor by helping them buy a new car or land a new apartment. But even if you are assisting someone you know and trust, you are putting your own finances at risk. If the other person fails to make a loan payment or doesn't pay the rent, you will be on the hook for whatever is owed. If you can't make the payments, it will show up on your credit report and hurt your credit score. Even if the other party pays on time, you are increasing your debt-to-income ratio by being a co-signer to any loans, and that can hurt your own ability to get a loan.

If you feel strongly about helping someone out with a lease or loan, it's better to protect your own credit by making them a personal loan, preferably one that won't sink you financially if they don't pay you back.

2. Adding an authorized user to your credit card

It's hard to build credit when you're first starting out. That's why some parents choose to make their child an authorized user on their credit card. This is often a great way for your teen to start building credit.

But there are right and wrong ways to do it. This strategy can backfire financially, especially if you're not keeping an eye on their spending. Missed payments and high debt levels could impact both of your credit scores.

It's best to add your child as an authorized user only if you can closely track their spending. Once they've established that they can be financially responsible, let them get their own credit card if they qualify for one.

3. Donating to a bad charity

It's unfortunate, but every once in awhile you'll hear a story about a nonprofit group that either failed to live up to its mission or was a complete scam from the start. Hopefully, if you've donated to a bad charity, you've walked away with nothing more than a few lost dollars. But in a worst-case scenario, you may have unwittingly contributed to illegal activity.

Before you donate to a charity, take some time to research the organization. Read their annual report and any public financial documents. Ask for their tax ID number and tax forms. Giving money is great, but it's worth taking the time to make sure it's going to a good and honest cause.

4. Lending money to your kids

There's nothing philosophically wrong with helping your kids out with money if you're in a position to do so. But if you're constantly giving them money or bailing them out of situations, you may be throwing good money after bad. Moreover, you're failing to teach them how to be financially responsible on their own.

Even young children should learn the basics of budgeting and saving, and the consequences that come from, say, spending all their allowance on candy and then not having enough money to go to the movies with their friends. Teens should be encouraged to get part-time jobs if possible to help pay for vehicles or college. These lessons give them the skills to be financially independent, making them much better off financially in the long run than if you simply give them cash whenever they need it. (See also: How to Help Your Kid Build Their First Budget)

5. Paying for your kid's college

With college costs rising to outlandish heights, many parents are making an effort to save for all or part of a child's education. This is a generous deed that could result in a child avoiding costly student loans.

It's important, however, to avoid taking away too much from your own savings goals. If you save for your children's college education instead of saving for your own retirement, this may impact the lifestyle you can afford after you stop working. It's always possible to borrow for college, if necessary. But no one's handing out loans to cover your 30-plus years of retirement. (See also: Why Saving Too Much for a College Fund Is a Bad Idea)

6. Socially responsible investing

There are many investors who want to make money in the stock market but don't want to go against some of their core beliefs. They may choose not to invest in energy companies that have gotten in trouble for polluting, for example. Or they stay away from investing in casinos for religious reasons. There's nothing wrong with this, and it's definitely possible to invest well without violating your principles.

But it's important to know how these choices impact your investment returns. For one thing, there are many well-performing stocks that you may find objectionable, so you need to be comfortable with the notion of giving up some potentially big returns. It's also not easy to find an index fund (an often-recommended type of fund that mirrors a particular stock index or market segment) that doesn't own shares of at least one company you might object to, though socially responsible index funds have become more plentiful. Just make your decision to abstain from certain investments with full knowledge of how it might cost you.

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