Avoid these money major missteps
Filed under: Debt — Sabine @ 11:18 pm
What you can do to avoid getting into debt?
Experts say there are certain money missteps that many of us are likely to make. Here are the major money missteps that can easily land you in debt. These are very common missteps that many of us fall into without even knowing it.
Buying a new car
OK, this is not so much a money misstep (unless you really can’t afford a new car, or finance it with a high interest rate) as a preference that can easily get you into debt. Sure, you love that new car smell, the feeling that you are the one adding up the miles, but it is a known fact that new cars depreciate several thousand dollars as within the first year. Save yourself all that money that you’re paying for the privilege of the new car smell and buy a high quality pre-owned vehicle. Many used cars still carry the original warranty-even more incentive for buying a quality used vehicle.
Borrowing from your 401(k) or 403(b)
In most cases, you won’t get a great deal at all. Your 401(k) deals are pre-tax, which means that eventually the money that you put in will get taxed when you withdraw it. Taking out a loan from your 401(k) or 403(b) means that you will be borrowing from pre-tax dollar which will eventually have to be repaid. When you eventually retire and begin your withdrawals, you will be taxed again. If you borrow money from your 401(k) or 403(b), you will effectively be getting taxed twice. Did you know that you are also required to repay the loan in only a few months? If you don’t happen to have the money for repayment, your loan will be treated as a withdrawal. You can expect a whopping 10 percent early withdrawal penalty.
Using your home equity line of credit to pay off your credit card debt
You can lose your home if this doesn’t work out. Credit card debt is often described by unsecured debt, because there’s no real collateral that the credit card company can force you to sell in order to collect on the debt. A home mortgage and home equity loan is known as secured debt because your home is the collateral. But if you fall behind your payments, the lender can easily require you to sell your home in order to collect on the debt.
Avoid buying a variable annuity
When you buy a variable annuity you are making a contract with the insurance company and the money is used to buy mutual funds. Salesmen may try to pitch this kind of investment as a way of buying and selling funds inside the annuity without the tax bills as long as the money is invested. But did you know that you will have to pay income tax on any withdrawals? Plus, if you withdraw any money from your variable annuities before you are approximately 60 years of age, you will also be penalized with a 10 percent fee. So watch out for what may seem like a great deal on that tempting variable annuity. There are often many buried fees that are attached to variable annuities. Make sure to read all the fine print.
Do not finance your new home purchase with a variable interest loan
Avoid those low initial teaser rates for financing your new home. If you can’t afford the home otherwise, you should probably not buy the home. Avoid option adjustable rate mortgages too. This will usually cause your loan balance to become bigger each month as the lender adds the unpaid interest on the balance of your home loan. Watch out for those great introductory rates-they can often turn out to be not-so-great.economy.
It’s time to take personal responsibility and take an honest look at what we have done to contribute to the situation. The fact is that it is easier today than ever before to buy things we cannot afford and do not have the money to pay for. Not only do we convince ourselves that we need things but we convince ourselves that we need them now. Then, not only do we have to pay for things we can’t afford but we have to pay the interest on the loans we took out to pay for them. That doesn’t even take into account the exorbitant amount of fees associated with credit card use and other forms of borrowing money.
Can you imagine walking into a bank and asking for a loan to buy groceries or a new purse? Sounds absurd, doesn’t it? In essence, though, that’s exactly what we’re doing each time we swipe that plastic card for these types of purchases. We’ve gotten so used to shopping with plastic that we’ve forgotten we’re actually borrowing money each time we do so! In order to simplify our lives and live debt free, we have to make an honest assessment of where we are and where we want to go.
Tomorrow, we’ll look more closely at assessing our unique situation to see what changes, if any, need to be made. In the meantime, spend a few minutes thinking about what, if anything, debt is holding you back from or keeping you from accomplishing. What would you have time, energy, and money to do if you weren’t burdened with debt? For more information on how to simplify your entire lifestyle, check out the whole package at http://www.abundantlivingebooks.com/self-improvement/debtconsolidation/
Sincerely, Sabine
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