3 Money Mistakes You Don’t Want to Make
People make mistakes all the time, like taking bad advice from a friend or forgetting you had that dentist appointment that you’ve missed for the 4th time. A lot of times a mistake is just that, a mistake. But when it comes to your personal finances, a mistake can really impact your financial future. These 3 money mistakes are ones that you generally don’t want to make.
Borrowing from 401(k)
If you need money, borrowing from your 401(k) is normally not the answer. If someone suggests for you do that, it is important that you ask them some very important questions. First, how does this money get paid back and under what terms? Loan repayments are paid back with after-tax dollars and when you ultimately distribute them in retirement they are taxed again. Second, what happens if I lose my job? Typically in most plans, you will be required to pay back the entire loan immediately if you leave your employer. Otherwise, that money becomes a distribution, which incurs tax and potential penalties. Remember, your 401(k) is there to build money for your retirement. It’s something that really should not be touched until you reach your golden years. If you are following a rules based approach to your financial decisions, you would have built liquidity in a savings account to provide you with the cash you need rather than have to go into debt or borrow from your 401(k). Why would you want to borrow against your happiness in retirement? You worked so hard to save that money, don’t use it if you can avoid it.
Not Insuring Your Most Valuable Asset
There are two things that you likely need in your portfolio – life insurance and disability insurance. Don’t make the mistake of not insuring your most valuable asset; yourself. Who would be financially impacted if something was to happen and you could not work, or even worse, the unthinkable happens? Did you know that suffering a disability that keeps you out of work contributes to 62% of all personal bankruptcies, according to a study by the American Journal of Medicine? Many people are under the misconception that life insurance and disability insurance are very expensive when that may not be the case. Talk to your adviser to help find the right product to fit your needs. And remember, since age is a major factor in what you pay, it will likely never be cheaper for you to buy than it is today.*
Not Changing Bad Behavior
As of March 2016, the estimated total amount of outstanding credit card debt in America is $762 billion dollars. Even with all the education out there around debt management, debt is obviously still a problem for a lot of people. So, if this is an issue for you, consider that your behavior may be the number one thing holding you back. Take credit card debt for example. Paying down your credit card debt or consolidating debt is great but if don’t modify the behavior that got you into debt in the first place, then you will be in even more trouble. A credit counselor or financial adviser can comb over your spending and help you identify trends. Perhaps you were pouring too much of your income into basic expenses such as housing, car payments and living costs, and you need to evaluate ways to downgrade. It is important to live within your means.
Don’t make protecting, saving, and enjoying your money harder than it has to be. Make sure you work with an adviser that can help you make your financial life sane, sound, and simple.
For informational purposes only. The views expressed are solely those of the author and are not meant to be specific investment or financial advice for your specific situation. Talk to a licensed professional before taking any action. This post was originally published at andefrazier.com.
*Many factors determine the rate you pay for life insurance: Age, occupation, health, smoker/non-smoker, etc.