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Tuesday, October 02, 2012

THE TWENTY BIGGEST MONEY MISTAKES

Steve Cole reports: I sometimes think I would have made more money (and enjoyed life just as much) being a financial guru instead of a game designer. After all, I paid off my last debt about the time Dave Ramsey went bankrupt (1986), and have run a successful small business without borrowing money for a dozen years now. From a variety of sources and my own experiences, I have compiled this list of the 20 dumbest things you can do with your money. The first few are the dumbest of the dumb but after that they're in a random order.
      

1. OPERATE WITHOUT A BUDGET: You don't have to be nitpicky, but set up some general categories. Always know when the next big bill is coming, always have an emergency fund, invest in some savings and retirement, and avoid spending more than you have. This applies to singles but especially to couples (and especially to non-married couples). Know how much each person is allowed to spend (and actually spends). If your girlfriend/roommate is buying expensive stuff, will that person have the rent money when it's due? (If your spouse is spending wildly, will YOU have the mortgage payment when IT'S due?) Now, normally conservative people don't need much of a budget plan since they unconsciously just don't spend a lot of money, but if you tend to splurge a lot or ever come up short at the end of the month, you need to set a written budget and stick to it.
     

2. CO-SIGN A LOAN: You ARE going to end up getting stuck with the payments. If the borrower was good for the payments he would not need a co-signer. This is bad enough with a house that you can go take possession of, but it's horrible when it's a truck that disappeared with the deadbeat. If you just have to help a relative this way, don't co-sign the note but set up a separate cash loan, and keep the amount small. Never borrow money to lend it to someone.
     

3. CASH VALUE LIFE INSURANCE: This has got to be the dumbest investment ever. What it does is to combine the death benefit of a cheap term policy with an investment. But the investment pays lower than market rates, you have to "borrow" the investment if you want the money, the money you borrowed is deducted from the death benefit you paid for already, and if you die the death benefit is paid and the investment disappears. The only reason this nonsense exists is because it pays sales commissions to people who convince idiots to buy it.
    

4. CASH IN YOUR RETIREMENT: The costs in tax penalties are horrendous. You could borrow money from a loan shark for less. Worse, retirement plans are usually protected from bankruptcy or lawsuits, so taking the money out of this protected cocoon just makes it available for someone else to take away from you.
     

5. PAYDAY LOANS: Speaking of loan sharks, here they are, in all of their legal (in some states) glory. Their fees and rates are beyond the moon, and you cannot bankrupt your out of them since they roll over every 30 days and bankruptcy won't discharge "recent" borrowing. Doing without something, paying a bill late, or borrowing $50 from your worst rival is preferable to payday loan stores. The only time you'd even consider this is when two conditions both exist: the penalty for not paying someone is life changing, and you already know you'll have the money to pay it back in full and never do this again.
       

6. BUY A HOUSE WITH A NON-SPOUSE: It's great that you're really in love and don't need to get married, but don't buy a house (or anything else) without getting married. A girlfriend can just get up and walk out, leaving you with a house that's too expensive for you to keep and hard to get sold when someone who now hates you is on the deed. At least in a messy divorce there are lawyers and judges who will force the other person to do the right thing. While we're here, don't buy a house with your brother or uncle or cousin. You each need your own investments that don't depend on anyone else performing some promised task.
        
7. TRUST A SALESMAN: Think about it before you buy anything for more than $100, let alone a house, car, or investment. Is all of the information about why this is a good deal coming from a single source? (You do realize that con artists have computers and can easily fake magazine articles telling why the investment they are selling is just the thing for everyone in your age group.) It's rare for something to "be gone by the end of the day." Do your research, before you shop and after you identify what you might buy. Never buy anything from a cold call, not without a lot of extra checking. By the way, the same advice applies to bill collectors, who all too often lie about what you owe, when it must be paid, and what they're going to do to you or your credit rating or your bank account.
     

8. PAY TOO MUCH FOR COLLEGE: I think everyone needs to decide what role education will play in their lives and find the best deal on the education that fits. If you want a technical degree (law, engineering, chemistry, medicine, accounting) that produces a good-paying job, you can afford to pay somewhat more. If you're just wanting to get a liberal arts degree to learn more about the world (how to think and plan), don't pay much for it. Do everything you can to hold down expenses, including living at home and going to community college for the first two years. (Live at home all four years if you can.) I would advise against paying big money for a big-time college, as you will lose money in the long run. (If you're so good at something that you need a really expensive degree, you're good enough to get a scholarship for it. Take the fact that you didn't get a scholarship as proof that you're not going to be an elite engineer and go to State Tech.) Save money by working a part-time job and living cheap. While I'm here, I'll mention that most private student loans cannot be consolidated at a lower interest rate later.
 

9. DEBT CONSOLIDATION: Sometimes, people consolidate their unsecured credit card debt into their secured mortgages. That's one way to handle a mess, but it's dangerous (harder to bankrupt your way out) and if you just run up the credit cards again, you wasted your time and will end up losing everything.
        

10. KEEP LOSING MONEY: If you're losing money on an investment, a business, or your general budget, don't keep doing it. Take a long hard look at what you're doing and (if there is not an imminent change in the future) make a proactive decision to change something. Find a way to reduce expenses and boost revenues.
     

11. SALES-LOAD MUTUAL FUNDS: Check the records. The returns on no-load funds are about the same, and these load funds exist only because they take money away from you to pay the commissioned salesman who convinces you to buy them.
  

12. BUY A TIMESHARE: This is another ridiculously bad investment which only happens because some salesman is getting a commission for talking you into it. You'll end up paying more in membership costs and maintenance fees that you'd spend getting a hotel room, and a timeshare is a lot less flexible. (Claims you can easily trade your Vegas timeshare for a timeshare in Aruba this year and Hawaii next year are very unlikely to work out.) You have less flexibility, and if they don't maintain the building, people without timeshares can just go somewhere else.
        

13. INVEST IN JEWELRY: If you want a piece of jewelry, and you can buy it for cash, then buy it. Do not, however, convince yourself that it's an investment. The markup on jewelry is big, and you'll be lucky to get half of the current retail value of jewelry when you sell it. There are rare exceptions but you'd have better odds of winning the lottery than dumb-lucking into one of those.
    

14. USE A FINANCIAL ADVISER ON COMMISSION: If you have enough money to need a financial adviser, find one who takes a flat fee, not one who only makes money if he sells you an investment. He will advise you to buy something stupid (like cash value life insurance, mutual funds with sales loads, timeshares, or bad stock the brokerage wants to unload on some unsuspecting idiot).
        
15. GIVE ACCESS TO YOUR ACCOUNT: Never give a bill collector authority to draft your account. No matter what he says he will settle the account for on the phone, he will take the full amount from the account (plus any phony finance charges he can dream up).
       

16. LIVE IT UP ON CREDIT: If you don't have the money, avoid spending it on stuff you don't need. Being short of cash and buying groceries on a credit card and making it a point to work some overtime to pay the bill, that's ok. Spending money you don't have on fancy vacations is a dumb idea. For bonus stupidity, spend student loans going on vacation. If you have to borrow money to go to college, you don't need to be going on vacation.
  

17. NEW CARS: Any financial expert will tell you that a new car depreciates by 30% when you drive it off of the lot. All will tell you to buy a three-year-old car for half the price and drive it until it falls apart. Financially, that's good advice, but I have to admit on this one that I buy new cars because I'm just not a car guy. For me, buying a used car means I'm going to get sold some piece of junk that will cost me a bundle in repairs the first week.
    

18. DON'T SAVE FOR RETIREMENT: Social Security won't be there and even if it is won't pay much. You need to be putting money away in a Roth IRA. If your employer matches your contribution, do it up to the value of the match before you do anything beyond survival (food, shelter, utilities).
      

19. EAT OUT A LOT: You'll spend at least $12 having a modest lunch in a restaurant, three or four times what you'd spend bringing a sandwich and an apple from home. The sandwich will probably be better for you anyway. For that matter, the cheaper brands of microwave dinners are hot and not that much more expensive. I can happily eat for less than $2 a meal with cans of stew, ravioli, spaghetti, or chicken and dumplings, and frankly, the flavor is not that much worse and far more consistent. Ok, truth here, I eat almost every lunch in a restaurant, but that (for me) is more a matter of being lazy and disorganized, and for a fuddy duddy like me, a restaurant lunch (often with a business discussion with partners or the restaurant owner or manager) is what passes for my social life.
     

20. THOUSAND DOLLAR TOYS: I have seen women gush about how their life will be so much better if they buy a $1,000 (or more) Gucci or Chanel handbag, or some other such bit of nonsense. (Guys are no better, buying expensive power tools that get far less use than you'd think, or expensive truck accessories. Do not get me started on Rolex watches for either sex.) It's a horrible investment. (A used one would sell for half of the current market and you could sell your item for half of that, maybe.) It can go out of style any time. It's easily lost, stolen, or damaged.