15 Financial Moves to Avoid at All Costs

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financial moves to avoidWe all want to succeed with our finances, but there are so many of us that make idiotic financial decisions without even realizing it! After many years of working our tails off, our retirement accounts are still tiny and our bank accounts haven’t seen a comma in what seems to be a lifetime. Most of our money woes can be directly tied to the financial moves below. Take a look at the top financial moves to avoid and promise never to do any of them!!

#1. Cosign on a Loan

I put cosigning a loan at the top of the financial moves to avoid because it is becoming so common today, but can completely ruin your finances! So many students are off to college and need some big loans to pay for their schooling. Because the risk of default is great, many financial institutions are requiring a co-signer to cover the student loans. Parents, aunts, uncles, and grandparents often come to the rescue and co-sign on the loan so that the student can continue their education.

This seems admirable and all, but quite honestly, if the government and private lenders think that the risk of default is too great, then you probably shouldn’t take on the risk either. Sure, you think that your kid is special and will do everything possible to pay you back, and maybe they will, but what if they can’t find a job? Or what if their payments turn out to be too much for them to repay on their newbie salary? The answer is simple, you will have to pay it for them – either that or do nothing and have your credit ruined. If they default on the loan that you cosigned, then that means you are defaulting as well. Are you ready for those calls from the collection agency?

Do these kids a favor and teach them that life is hard. Perhaps they’ll have to work a part-time job while in school or go to a community college for a couple of years. It certainly wouldn’t be the end of the world and might actually make them a better person because of it.

20150223 - retail leases#2. Lease Your Ride

Leases are becoming more and more popular today, mainly because the proposed low payments allow almost anyone the means to drive a brand new car. However, as your mom used to say, “Just because everyone’s doing it doesn’t mean that you should too!”

As you can see in the graphic to the right, nearly half of the population that’s driving around in a luxury sedan don’t own it outright. In fact, most of them aren’t even making payments to own it! Nope, instead they are renting their vehicle for two or three years (that’s right, lease is just a fancy word for rent).

A lease might sound a good deal because of that low payment, but in the end you will probably owe the dealership a bunch of fees (for the dings and dents and the mile overage), which makes the whole ordeal insanely expensive. And, in the end you own absolutely nothing!

If you can’t afford to pay for a car with cash, then maybe you should consider taking the bus instead. Leasing is just a complete rip-off.

#3. Going Without Insurance

Car insurance, medical insurance, life insurance, home insurance – it can all seem like a big waste of money because we rarely even need it! We keep paying hundreds (if not thousands) of dollars in premiums each month and how often has our house burned down? Never.

However, insurance is a necessary part of life. It’s true that the major financial disasters often never happen, but if they did and you didn’t have insurance, it could be absolutely devastating! I had an uncle that tried to play this game once. One day he was fed up with paying all that money for medical insurance, so he decided to cancel it. If they broke an arm or needed a spinal alignment, they had enough cash to where they could pay for it outright. It made perfect sense…until his wife got cancer. The radiation, therapy, and the many doctors’ visits put them in the hole by hundreds of thousands of dollars.

Don’t ever try to game the system and do without insurance. Yes, paying those premiums really blows, but it’s a necessary evil to avoid financial disaster.

financial moves to avoid#4. Making Investments You Don’t Understand

Let’s face it, investments can be complicated. But, instead of just throwing your money into a hat and hoping that you picked a winner (last I checked, that was gambling, and we don’t want to gamble with our money), you really need to understand what it is that you are investing in.

If you fully understand puts and shorts in the market and have a track record of earning money this way, then go for it. But, if you can only wrap your head around mutual funds and bonds, then keep your money there. Rather than get suckered into a supposed lock of a deal that will earn you 20% or 30% (that you don’t understand), keep your money in those areas that make sense to you and where you are consistently earning money. Don’t get fancy, just stick with what works and stay consistent.

#5. Doing Without the Emergency Fund

Hands down, doing without an emergency fund is in the top five financial moves to avoid. Without an emergency fund, when life happens and you have nothing in the bank, then your only lifeline is to reach for that high-interest credit card. With interest rates around 20%, the credit card is one of the most foolish financial tools out there.

It’s not fancy or sexy, but the emergency fund is a necessity.

#6. Lending Money to a Family Member

Many people loan money out to family members because they just want to help. However, this act is often more of a hurt than a help. By lending money, not only are you probably aiding a bad habit that will happen over and over again, but a loan between family can often cause massive stress, arguments, and ultimately, divide. It just isn’t worth it.

financial moves to avoid#7. Buying  a Timeshare

It seems that most people know that a timeshare is a bad idea, but when they’re walking those sandy beaches at their favorite vacation spot and are presented with a deal that could make this their permanent getaway, it suddenly doesn’t sound like such a bad financial move.

When presented with a timeshare, ask yourself if the purchase price is really worth it. In other words, if the timeshare deal costs $20,000 for the rights to one week a year, then you would expect the condo’s value would be over a million bucks, right? (since $20,000 x 52 weeks is $1,040,000). If the condo is valued at much less than that, then the timeshare is a rip-off (and most of them are by the way).

Beyond the purchase price, there are often ongoing fees as well (to cover the maintenance of the property) that make the deal even worse. As a rule of thumb, just run away from these “investments”.

#8. Jumping in and Out of the Market

According to Forbes, the average investor has only earned an average of 2.6% in the market over the past 10 years. Why? Simply put, emotions. They buy when they should sell and sell when they should buy because of fear and greed.

Instead of jumping in and out of the market, it is often more beneficial to keep pumping money into the market – even on the downswings! It may sound odd, but if you keep buying shares of a stock when it’s on the way down, you are essentially buying them at a discount. If the price returns to it’s original price, then you’ll have earned more than if the stock went unchanged! Take a look at the chart below for a more visual representation.

20150223 - dollar cost averaging

Source: JP Morgan Asset Management

#9. House Hopping/Upgrading

I wrote an article about a month ago on house hopping. Most people move and upgrade their homes every 3-5 years, and this is costing them severely in interest, realtor fees, and closing costs. The wealthy refuse to house hop and lost all that money. Instead, they buy a sufficient house for their family size and live there for 20+ years.

financial moves to avoid#10. Using Retirement Money for Kid’s College

It may seem admirable to forgo your retirement savings to fund your child’s college education, but quite honestly this is probably hurting your children even more than if you would have them pay their own college costs. By ignoring your retirement fund, you are just signing up your kids to cover your costs of living when you get older, and this could be extremely harmful, especially if they have a family and kids of their own at that point. By forgoing your retirement fund, you are very likely starting a downward spiral of financial struggles for your family tree.

#11. Holding Credit Card Debt

This should really go without saying, but with the average credit card debt at $7,283, perhaps it needs to be said again: credit card debt is stupid. Holding debt on your credit card is definitely one of those financial moves to avoid at all costs. With interest rates at 15% or more, it can often be difficult to dig your way out! If you have a problem with spending, you might just want to cut up your credit cards once and for all and commit to using cash. That’s how serious you should be about your credit card debt.

#12. Putting Off Your Will

I have to admit that I am at fault here. Now, I don’t have any children and I don’t have a spouse, but I have a fairly high net worth that I really wouldn’t want to go to the state if I passed away. In my defense, I have taken the first step and gotten the proper forms from the library, but I haven’t filled them out, have not had them notarized, and haven’t yet filed them. Ha, apparently, I have done very little in the grand scheme of things. But, if you have children, a spouse, or $10,000 to your name, then I would highly advise making out your will.

Just think, if you put your will off long enough and you and your spouse pass away in a car accident, what would happen to your children? Well, without a will, they would become property of the state, who might decide to put them in foster car or maybe even give them to your delinquent brother that can barely spell his own name, let alone take care of children. In the end, it might cost you $200 (at maximum), but to be a responsible adult and to give yourself a peace of mind, I would recommend taking care of your will sooner rather than later.

financial moves to avoid#13. Cashing Out Your 401k to Pay Off the Mortgage

Ugh, this one has become incredibly popular lately and is definitely one of the top financial moves to avoid during your life. For some reason, people absolutely hate their home mortgage. They hate it so much that they are willing to remove funds from their retirement at a penalty in order to pay off a loan whose interest rate is the lowest in history (often as low as 3.25%).

Cashing out your 401k to pay off the mortgage is stupid because:

  • You’ll pay a 10% penalty on the money you withdraw
  • You are forgoing a huge amount of interest by removing the lump sum amount
  • You will be taxed heavily because you are likely in your peak earning years

There are other reasons, but those are the top three. As an example, if you are decide to pull out $50,000 from your 401k to pay off the mortgage, that money will be taxed somewhere around 30% and then you’ll be penalized another 10% for withdrawing before the age of 59 1/2 , leaving you with only $30,000. By paying off the mortgage, you are probably saving yourself $5,000 or so in interest payments, but what about the earnings that you could have made on that $50,000? If the market went up by 10% in the first year, you would have earned $5,000 with that money, and then what about all the years after? That $50,000 could easily turn into $100,000 in 10 years, $200,000 in 20 years, or $400,000 in 30 years, but since you used it on your mortgage, you turned it into $35,000. Ummm, that is probably the wrong move.

I love the idea of paying off all of your debt, including the mortgage, but I would hardly ever advise someone to use their 401k money to do it.

#14. Ignoring Your Career Path

Some people get stuck in a career that they hate and end up just riding it out until their retirement years. Talk about a waste of life! During that time, you could have gone back to school, started a whole new career, and actually have been excited about the work that you do! Not to mention, if you actually put an effort into your career, then your earnings will likely show that effort as well. By standing passively and letting life happen to you, you are likely losing out on hundreds of thousands of dollars over the course of your lifetime.

#15. Ignoring Maintenance Requirements

I don’t often see this one on the lists of financial moves to avoid during your life, but I think it’s incredibly important. By ignoring maintenance requirements on your house, your car, or your tools, you are essentially letting them waste away to become worthless!

If you had a house with a leaky roof, wouldn’t it be worth spending a few thousand dollars to fix it in order to save the value of your $150,000 house? Of course it would! By keeping your stuff in great shape, your bank account will likely stay in great shape as well.

Summary: Financial Moves to Avoid

Well there you have it! An extremely long list of financial moves to avoid over the course of your life. I may have gotten a little bit winded here, but if you avoid all of these mistakes over the course of your life, then you will likely become a very rich man or woman.

Have you made any of the mistakes above? Are there other ‘financial moves to avoid’ that you would add to the list?

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8 comments to 15 Financial Moves to Avoid at All Costs

  • We had friends of ours recently ask us to cosign a loan for them. The wife got laid off and they had declared bankruptcy and are having a hard time securing a loan so they wanted us to cosign. Uhhhh….no.

    • Sometimes these situations are tough though aren’t they? You really want to help, but you know you shouldn’t! Great job going with “no” though. You just can’t put your family at risk like that.

  • I for sure learned my lesson about co-signing for a loan. At the time I thought I was helping my dad out, but in the end I just screwed myself. He had just gotten out of prison, and naive me thought this time would be different.

    I wanted to see him make something of his life and when he asked me to help him buy a car, I agreed. I cosigned for the $6,000 loan on a certified used car and paid the first 6-months of the insurance.

    Then one day I get a call from the finance company that payments had not been made for months. When I finally track my dad down I find out that he had gotten a new car, that he had my aunt co-sign for him and decided to stop making payments on the one I helped him buy.

    The icing on the cake is that he had completely trashed the car. I took the car that day and was only able to sell it for $1,000. And I wired $3,500 to the financing company to pay the car off.

    Will never do that again. Guess this also falls under never lend family money.

    Lessons learned and not to be repeated.

    Cheers!
    Gen Y Finance Guy recently posted..My Love/Hate Relationship with Tax Season

  • Making investments you don’t understand is big. If you can’t understand it and the person trying to sell it to you can’t explain it in a way that makes sense, then you need to run!
    Jon @ Money Smart Guides recently posted..8 Free Excel Spreadsheet Templates

    • It doesn’t exactly fall under investments, but I once had a gas company rep show up at my door. Supposedly, they represented the natural gas company that serviced my fuel needs at my house. After her 2-minute spiel, she said that by signing the document that she had with her, I would reduce my bill by 20% or more. I asked her to repeat her spiel again because it didn’t make sense how her explanation would lead to me saving money. The second time was no better, so I told her thanks but no thanks, I don’t agree to things I don’t understand. Most likely, this was a scam and I’m still glad I sent her on her way.

  • Ok so #13 …. our 403 & 401 both allow withdrawal for down payment on our first house. This is not good idea then? It was gonna be part of our plan in five years to take advantage of this since my employer contributes well to my 403. They give an extra “core contribution”, so I figured I could tap that without touching what is regularly contributed. Not a good idea then ? 🙁
    Dawn recently posted..Net Worth Feb, Good Bad & Ugly

    • Hi Dawn. Great question. First of all, be sure that your 401ks actually allow a withdraw for a first time home purchase. Many (especially corporate 401ks) do not and would require you to first roll the money into a traditional IRA in order to make the penalty-free withdraw. Secondly, be sure that you are 100% vested in the money from the company match. Sometimes employees are not fully vested in those contributions until three years later. So, if you pull your money out before that three year period, the company’s contribution goes back to them.

      Now that we got that out of the way, I never consider it a good idea to invest money in something that you do not intend to use for that purpose in the long term. In other words, I don’t really like the idea of putting a lot of money into the stock market for the purpose of buying a house. While the stock market typically tends to rise, it could fall by 20% and quite a bit of your hard-earned money just vanishes. Also, by removing those funds, you are forgoing the possibility of that money increasing in value in the future.

      Put simply, it’s typically best to invest money into your funds that you plan to leave there and retire on. If you want to save up for a house, then I would put that money aside into a savings or money market account where you can easily access it and it’s safe from losing any of its value.

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