7 Decisions That Seem OK Now, but Might Ruin Your Finances Later
No matter how hard they try, some people can't get out of the financial hole they've created. This might be due to financial circumstances beyond their control, such as a job loss or medical debt. But a lot of times, financial worries are the direct result of poor choices.
Some decisions can have disastrous financial consequences, but there are ways to avert these setbacks. Before you can make a smart money move, however, you have to recognize bad ones. (See also: Our Worst Financial Mistakes)
1. Cosigning a Loan
Regardless of whether it's your child or your sibling, cosigning a loan can be financial (and credit) suicide.
As a cosigner, you're not a silent partner in the deal. From a lender's standpoint, you're just as responsible for the loan. The primary signer may vow to pay the loan on time and promise to protect your credit history, but there are never any guarantees. If this person defaults, you'll have to repay the debt, or else suffer the financial and credit consequences.
2. Marrying Poorly
It's easy to overlook financial warning signs when you're in love and planning a marriage. However, before you walk down the aisle, it's important to determine whether your partner is a financial match.
If your partner is irresponsible with money, this could not only set you back financially, it could also strain your marriage. It might take longer to buy a house or start a family; and if the majority of your partner's money goes toward debt, you might cover more than your fair share of household expenses, which can be burdensome and frustrating. (See also: 7 Reasons Why You Shouldn't Get Married If You're in Debt)
Have a candid financial discussion with your partner. Your finances don't have to be perfect. But if you know what you're dealing with, and if both of you are on the same page, you can work together to improve your finances. This way, there are no surprises after tying the knot.
3. Delaying 401(k) Contributions
Many employees have the option of enrolling in an employer-sponsored retirement plan. If you're given this option, you owe it to yourself to consider the possibility. Regrettably, some people put off retirement planning for as long as they can. But the longer you wait, the less you'll have when you're ready to leave the workforce.
For example, a 20-year-old who contributes $5,000 annually to her retirement plan can amass about $2.2 million by age 65. However, if she waits until 40 to start saving and contributes $5,000 annually until retirement, she would only have $430,000 in the account by age 65. This is based on an average 8% return. Don't wait.
4. Living Beyond Your Means
Buying a house is the so-called American dream. But you shouldn't break the bank or overextend yourself to achieve this dream. Too often, homebuyers become overly excited and fall in love with houses that are beyond reach.
You might be able to afford a house on paper. But even if a lender says you qualify for a certain amount, you need to evaluate your other monthly expenses. For example, you might pay a lot for health insurance, auto insurance, day care, or have other expenses that don't appear on your credit report.
There's nothing wrong with getting the dream, just make sure you can afford the dream. If you end up house poor, there'll be little cash for savings and extras.
4. Using Credit Cards as an Extension of Income
Having a credit card with a $10,000 credit line doesn't mean you have an extra $10,000 to spend this year — unless you can afford to pay off the card.
Credit cards are safer when used for emergencies, or when you're able to pay off charges. Unfortunately, some people think of credit cards as their "I-can-buy-whatever-I-want-card." They might charge entertainment, clothes, and other basic needs — without any type of plan to pay off this debt. Credit card balances can accumulate quickly, and once you add in interest, it might take years to pay off balances.
5. Not Building an Emergency Savings Account
You might feel as if you have a lifetime to worry about saving money. However, a financial crisis can happen to anyone, regardless of age. Don't think that you're invincible. If you don't build a cash reserve, you might rely on credit cards whenever you need cash. And if you charge an expensive house or car repair to a high-interest credit card, you may have difficulty paying down the balance.
To build your savings, set aside 10% of your check each pay period. For this to happen, make adjustments in other areas. Can you lower your entertainment budget or reduce miscellaneous spending? Or maybe you can save on transportation and groceries. (See also: 101 Ways to Save Money Around the House)
7. Quitting Your Job Prematurely
You might be eager to quit your job once your home-based business grows. However, quitting your job before you're ready can have serious financial consequences. There are highs and lows when running a business. And if you don't prepare for the lows, you may not have cash in the bank to survive hard times.
Only quit your job if you have an adequate cash reserve, perhaps six or eight months. And only leave your job if the amount you're bringing in can cover your bills and provide a surplus. This way, you don't have to close shop if you lose one or two clients.
Did you make a bad decision that set you back financially? What was it? How did you handle it? Let me know in the comments below.