Things you should never do with money - Part I
Sometime the decisions we make that can negatively impact our financial future are not always obvious, there are too many entities working against our better judgment when it comes to how we handle our own money. I’m talking about commercial entities and the popular trends we pay so much attention to, that contribute to the ever growing “want list“ that we often mistake for the “need list”. I’m gathering a list of general things called “things you should never do with money”, there are many, and this is the first in a series of several future posts. These are some of the things we tend to give into that eventually get us into trouble:
1. Don’t sign up for another credit card when you’re maxed out - This should be a red flag for any credit card company processing your application that you’re not living within your means and you spend more than you should. Will that stop them from processing your application? Probably not. As long as you have good credit and you make your payments on time, even if it’s only the minimum due, there’s no indication to them that you’re a risk. But is this a sound financial decision for you? If you’ve maxed out your current credit card, you need to stop and look back at the purchases you have made and honestly determine if these are needs or wants. If you get another credit card, what’s to stop your from maxing it out also and ending up with now two cards to pay off?
2. Don’t borrow against your home - Here’s another example of a really bad decision in which lenders are happy to help you dig your own hole. A “HELOC” (Home Equity Line of Credit) is, in my opinion, the worst product ever put out in the financial world. Why? Two reasons, these loans always carry adjustable rates and you’re only required to pay the interest. If you MUST borrow against your home, what you should be asking for is a Home Equity Loan, on which you do pay the principal balance every time you make a payment. With a HELOC you’re only required, and 99% of the time inclined, to pay only the interest of the loan. When do you actually pay the balance? If you max out that line of credit and your balance is $50,000 when will you be able to pay this balance in full? When you sell your house would be one way, but if you’re not selling your house or if market conditions end up putting you upside down, how will you come up with the money to pay this off when it is due in full?
3. Don’t borrow against your retirement account - Depending on your plan, sometimes there are few restrictions for borrowing or withdrawing money, and there’s usually a lot of flexibility for you to do so. Some 401K or savings plans will allow you to withdraw certain amounts of money and you don’t always have to prove hardship. Why do this if you’re not in real need? It’s all impulse. You’ll probably say to yourself “it’s my money anyways”. Well…. yes and no. It’s also the government’s money and that’s a huge liability. The money that’s in your 401k or savings plan is pre-tax money, meaning it gets deducted from your pay before taxes, so taxes will apply when that money is withdrawn. Not only that, but there’s usually a penalty associated with early withdrawals, so if you borrow $5000, the IRS will automatically take 20% or $1000, plus any penalties the savings plan may carry. So if you’re not in real need, don’t mess with this account.
4. Don’t invest in things you know nothing about - There are so many products out there about making money by starting your own business or making money online. Look, a lot of people make a decent living by running their own business and doing business online. But it’s not supposed to be easy and it’s not supposed to be fun as it is often emphasized. It is a lot of hard work. Sure it can be enjoyable and rewarding but fun and easy it is not. Many of these programs almost always over emphasize earning potential with exaggerated figures, but if you visit the advertised website you often find that the program is not at all described and you have nothing to go by other than to enter your personal info for someone to call you later. They will often sell you general information on how to start a business but won’t concisely explain the how to. They also offer coaching programs with phony guarantees, which are expensive so think carefully before signing up. You could end up spending a lot of money for something you could easily research on your own.
