7 Foolish Money Moves That Can Sabotage Your Financial Goals
On April 1st and every day, avoid these pitfalls that can make you a financial fool.
A fool and his money are soon parted, or so the saying goes. While there is one day of the year where we must watch out for silly April Fool’s Day pranks, we need to be careful every day to avoid being made into financial fools.
Most of us have fallen for at least one of these foolish money mistakes.
Foolish Money Move #1: Taking out a payday loan
When faced with a lack of funds, some people decide to borrow from a payday loan shop. This is a super expensive way to borrow money. The average user typically needs less than $500 to get by, but because fees are so high, it is not uncommon to pay an extra $500 or more in charges.
In other words, it can cost more to borrow than the amount that was borrowed. To avoid getting into this type of trouble, set a goal to have at least $1,000 in an emergency savings fund. That will take care of the typical emergencies that most people use payday loans for.
Foolish Money Move #2: Paying your bills late
With as many bills as most people have, it can be easy to forget to make a payment. That will cost you a late fee and if not caught soon enough could damage your credit score. If you set up your bills to pay automatically using online bill pay, you can say goodbye to late fees.
Foolish Money Move #3: Skipping your 401(k) match
Many employers offer a retirement investment match for their employees’ 401(k) or similar retirement program. This can be as high as a 100% match, meaning that if you contribute $50 a month and your employer contributes $50 a month, you double your money right away!
If you fully participate in your 401(k) program to get the match, you should be on the road to having at least a six-figure retirement savings balance — and maybe even a seven-figure balance — if you start early enough. A fool is going to decide not to fund their 401(k) and lose the match. The average monthly Social Security check to retirees is about $1,400. Unless you plan to retire on this level of income, be sure to contribute enough to get your employer match.
Foolish Money Move #4: Cashing out your 401(k)
Few people stay at one job for their entire working life. When it is time to move to a new job, you will be asked what to do with your 401(k) balance.
It is tempting to just cash out the money and use it to catch up on bills. If you do that you will be surprised come tax time when you find out that an early 401(k) withdrawal has been taxed at your ordinary income tax rate — plus a 10% penalty. The worst part is you just wiped out a source of retirement funds that could have grown much greater, especially if you are decades away from retirement.
The better choice is to have the funds directly transferred to a rollover IRA. It will continue to grow until you are eligible to withdraw the money without penalty.
Foolish Money Move #5: Failing to get adequate insurance
Most people get the basic insurance coverage like home, health, and auto. But foolish people fail to get other insurance that is well worth the price.
If you have minor children, you should buy some term life insurance to replace your income should you die. For healthy young people, term life is surprisingly affordable. For the price of one pizza order a month, you could qualify for $200,000 of coverage — and likely much more.
Renters are fools if they fail to get renter’s insurance. Without renter’s insurance, if your possessions are lost to theft or a fire you are out of luck. Better to have renter’s insurance which should cost you pennies a day.
Last of all, here in the Mountain West, you may be in an earthquake zone. Your home is likely your most valuable asset. Your normal home owner’s insurance does not cover earthquakes. Earthquake coverage could double the amount you pay to insure your home, but not having this coverage means if your home is damaged in an earthquake you have zero coverage.
Foolish Money Move #6: Overdrafting your account
There are two types of overdraft fools. The first type decides not to get overdraft service and then when they have a check bounce they are stuck paying big fees. With overdraft service, the bill can get paid and then you can repay the overdraft with a modest fee.
The second type of overdraft fool doesn’t pay attention to their spending and maxes out their overdraft. That means your overdraft can’t be used to help prevent you from additional overspending — plus you have the overdraft to repay with interest. If you think you’re the second kind of fool, don’t sign up for overdraft service. Otherwise it’s a good option.
Foolish Money Move #7: Buying a car you can’t afford
For most people, next to buying a home, a car will be the largest purchase they make. This often requires people to take out an auto loan and repay it in monthly installments. It can be tempting to stretch out the repayment schedule so each month’s car payments are lower.
The problem is that if the car loses value faster than you can repay the loan, you could end up owing more than the car is worth — also known as being underwater. That makes it hard to get your next car because after selling your old car you still owe money with nothing to show for it.
To avoid making this foolish mistake, figure out how much you can afford by using a free online calculator before you go car shopping. Buy your car with cash, and if that’s not possible, make a big down payment with monthly payments that will keep your car worth more than your loan balance.
It’s a rare person who has been able to avoid making at least one of the mistakes. Welcome to the school of life. The good news is that experience is a good teacher. If you have made one of these mistakes before, hopefully you can avoid repeating it.
And remember: You’re not a fool if you take what you learn to make better decisions going forward.