If you ever watched the TV show COPS, then you noticed the bizarre number of times that people talked themselves into getting arrested. When the cops tell you that you can go, don’t stand there and argue, walk away. Likewise in personal finance, I’m always astounded at the number of people who are the cause of their own financial disasters.
The very worst part of talking to someone who has just crippled their financial life for decades is that, every single time, you’ll hear them say they had a bad feeling before doing it. Something wasn’t right but they pushed aside the concerns and forged ahead into financial disaster. Another depressing aspect is how common the big mistakes are when you research the subject. If you find yourself contemplating anything on this list, understand that you’re contemplating financial suicide.
Cosigning a Loan
It’s dumb, dumb, dumb but I see it over and over. People just don’t get that when they cosign a loan, they are equally responsible for the debt. The debt shows up on your credit report and the collection company will start calling you if the other party misses a payment. Nearly forty percent of cosigners end up paying off some part of the debt and more than a third saw their credit rating drop. Before you cosign a loan for a significant other or relative, read these cosigning horror stories. There’s a reason banks don’t want to loan them money!
Borrowing From a Retirement Account
This one gets me talking to myself when I read about people thinking about borrowing from a retirement account. First, it’s a twenty percent haircut, right off the top. It can take a decade or more to recover from a loss that steep. Then, on top of the straight loss, you still have to pay the money back! You borrow money from yourself, pay the government a twenty percent cut, then pay yourself back. How does that not register as absolutely insane when someone is thinking about it? The only time it’s ever okay to borrow from a retirement account is if you’re faced with imminent death.
Using Credit Cards As An Emergency Fund
This one is another one that makes my head spin around while I spew green vomit. If you put $1,000 on a credit card with 18% interest -a low interest rate by today’s standards -making the minimum payments will take you nine and half years to pay it off and you’ll pay over $900 in interest charges. If that loan was to pay off a mechanic’s bill, there’s a good chance you won’t even have the car by the time you pay back that bill. Okay, granted, few people make just the minimum payment but the math of borrowing money to pay emergency expenses is both crippling and unflinching.
Buying Too Much House
I have less sympathy for this mistake than most of the others. If you buy too much house that means that buying a home became an emotional decision for you somewhere along the way. You fell for the real estate agent quoting P&I (Principal and Interest) and forgot about mortgage insurance, taxes and homeowners insurance. For a lot of people that surprise comes at the closing table or, if you’re really lucky, the day before. By that point there’s a lot of pressure to keep the deal rolling downhill. A lot of justifications happen at the signing table. We can cut back on this or that and maybe junior has to go to public school another year. If you find yourself reaching to justify a crazy payment, just back out of the deal. Risking earnest money, which is rarely ever truly lost, is better than crippling your finances for decades.
It’s hard enough to make a decent living and save a little toward retirement, don’t complicate it by self-destructive behaviors.