bad decisions

7 Decisions That Seem OK Now, but Might Ruin Your Finances Later

Mikey Rox — Wed, 14 May 2014 08:12:28 +0000

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.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 "Life Hacks" You Shouldn't Bother With

Thursday Bram — Thu, 13 Dec 2012 11:24:33 +0000

Life hacks — or tricks intended to make life easier — are everywhere. There are life hacks for food, family, work, and everything else under the sun. But not all hacks are really beneficial. Some will just add another step to your daily routine. Some may wind up costing you much more than just your time. (See also: My Personal Productivity Rules...What Are Yours?)

1. Unlocking a Door Without a Key — in a Way That Requires the Door to Be Open Already

There are a lot of life hacks that may seem useful, like this one from Buzzfeed, but leave you with a solution for which there is no problem. If you can unlock a door to begin with, you probably have access to the key, and if you make it so that you can open the door without a key, anyone else can, too.

2. Extending a Deadline By Sending the Wrong File Type

I’ve heard this trick — sending a file as a .png rather than the expected .doc — recommended both for work and school situations, and I consider it downright dishonest. It may get you the end result that you want, but that’s not good enough. If a hack crosses the line into unethical or even illegal behavior, it’s not a good hack.

3. Using Doritos as a Seasoning

There may be a few people for whom that Dorito flavor is the greatest flavor ever, but it’s certainly one of the least appealing cooking hacks I’ve personally seen.

4. Taking Prescription Drugs in a Non-Prescribed Manner

You can find a lot of different hacks that involve taking prescribed medication for affects not intended by doctors, like making it easier to study. Unless you have a degree in pharmacology, though, it’s generally a bad idea to muck around with drugs without your doctor’s advice. If you really want to try such a hack, get your doctor to sign off on it first.

5. Multitasking

Many life hacks offer ways to do more than one thing at a time. But research has established that multitasking doesn’t work. You just wind up with two tasks that are both completed at a lower level. It’s better to just focus on one task and get through it quickly — and well.

6. Changing Your Family Traditions

Every year around the holidays, I’ll see a post or two that recommend hacking some other aspect of your holiday celebrations. The danger that you risk, though, is that you’re not just hacking your own life at that point — you’re changing how you interact with your family. There may be some changes that would be mutually beneficial, but it’s rare that you can change the status quo and still keep an extended family happy.

7. Anything That Requires Buying More Gear, Tools, or Apps

Most life hacks are inexpensive, but there’s always another piece of software you can buy to make your life easier or a new gadget that will change everything, at least according to the marketing team. The reality is that, most of the time, the change isn’t enough to make up for the money you’d have to spend, so it’s better to just hold on to your cash.

8. Continuously Tweaking Your Hacks

The pursuit of complete productivity is alluring, but you can wind up focusing just on perfecting your system rather than using the time you’ve saved to live. This recent essay on Lifehacker lays out the experiences of someone who went too far in his life hacks.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Parable of The Flat-Screen TV

Kentin Waits — Fri, 13 Jul 2012 10:24:13 +0000

Most of us know that we should try to spend less and save more. But much of the advice we hear and lessons we try to learn are abstract. We seldom hear a real story of an actual person making a truly unfortunate financial decision. I’d like to help change that. Here’s a little tale about a dear friend of mine, who I’ll call Dan. Dan was already walking a financial tightrope when he decided it was time to enthusiastically embrace the digital TV revolution. So in 2006, he threw caution (and a lot of money) to the wind and bought a new plasma TV. (See also: Massive List of Things to Do While Watching TV)

Now back in 2006, flat-screens of any kind were a relatively new phenomenon and were priced accordingly. Dan’s 42” TV retailed for $1,995. Since he was already strapped for cash and had a bumpy credit history, he purchased from a local store whose owners were willing to work with him on financing (at a 9% interest rate). This is where it gets interesting and where the details of his purchase really start to matter. To understand why this purchase was such a bad idea, we need to do some financial forensics on the real cost of the TV.

Early Adoption = Higher Price

This one is obvious, right? Today, a TV similar to Dan’s 6-year-old model retails for about $599. Through the miracle of market forces, competition, lower production costs, and the eagerness of early adopters, the price of flat-screens has fallen dramatically. If Dan had waited, he could have paid $1,396 less for essentially the same thing.

More Sales Tax Paid

Dan lived in Iowa and in 2006, the sales tax in that state was 5%. The total tax on his purchase was $99.75. Though Iowa’s sales tax had climbed to 6% by 2008, the lower price of the TV would have still had Dan paying only $35.94 in tax in 2012. The tax savings alone would have been $63.81.

Lots of Interest

Dan was paying the local electronics store 9% interest on his new TV. Since he managed to pay it off in 25 months, Dan’s total interest was $203.53. If Dan had saved an amount equal to the check he sent to the electronics store every month (about $95), he could have saved the entire 2012 purchase amount (tax included) in cash in about 6 1/2 months.

Loss of Earnings Potential

So far, Dan’s choice to purchase the TV early resulted in a higher price and that, of course, meant more sales tax. Also, since Dan purchased the TV at the height of its retail price, he was less likely to have the cash on-hand to pay, so he financed the steeper purchase price over the course of two years at 9%. But there’s another hidden cost we haven’t explored yet. Remember the $95 that Dan paid to his financier (17 months longer than he would have needed to if he’d waited and bought with cash later)? Well, let’s consider the lost potential of that money. At a 4% interest rate, the $1,615 ($95 X 17 months) would have earned a laughably small amount in interest. But what other debt, savings vehicles, or bills could that money have been directed toward? If a family makes 5 or 10 large purchases at similar or even worse terms, what’s the multiplying effect on their lives, their opportunities, and their fortunes?

In the end, Dan paid at least $1,663.34 more for his higher-priced, fully financed flat screen TV in 2006 than he would have paid with cash on the same model in 2012. Even with a fairly reasonable interest rate and paying more than the minimum due each month, Dan still didn’t fare too well in this transaction (and that’s without factoring in depreciation/resale value on such an early model TV vs. later models). Granted, I’m going purely by the numbers here. Some may argue that Dan’s viewing delight is harder to quantify, but no less important. Dan’s net loss of $277.22 per year for those six years might be mollified a bit by 42” worth of "Cupcake Wars" glowing on his wall. I hope so.

What financial decisions did you live to regret? Do you have friends or family who are still making whoppers of fiscal mistakes like Dan?

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: