Everybody makes mistakes. But while nobody’s perfect, there’s no reason to waste hundreds or even thousands of dollars on financial moves that are proven folly.
Here are eight common financial fouls you can avoid.
1. Borrowing to buy depreciating assets
Problem: Your IOU becomes an OMG when your purchase loses value. That’s why the housing crisis was so devastating to many families. Everybody with an underwater mortgage – meaning they suddenly owed more than their homes were worth – learned this the hard way.
How to avoid it: While homes typically increase in value, we generally know beforehand what’s going to lose value – almost everything. And borrowing money to buy things that decrease in value — like cars, see below — is simply compounding the loss. That’s why — ideally — credit should be used only to buy those few things that generally increase in value: a house, an education, or maybe a business.
2. Buying a new car
Problem: Here’s how Stacy described new-car shoppers in “Why I Don’t Buy New Cars“:
If consumers want to feel smart, they comparison shop, kick a few tires, and talk to a few salespeople in an attempt to get a decent deal. But even if they drive the hardest possible bargain, that new car is still guaranteed to lose thousands of dollars in value before they can get it home.
How to avoid it: For starters, buy used, preferably from private sellers. And there is something of an art to finding a great used car. Check out “8 Tips for Buying Your Next Car for Less” and “6 Things You Should Check Before Buying a Used Car.”
3. Saving while in debt
Problem: Savings provide a sense of security, but if you pay more interest on your debt than you earn on return on your investments, you’re going backward. One possible exception could be debt that comes with a tax benefit, such as mortgage interest or some student loans.
How to avoid it: As a rule of thumb, use low-interest savings to pay off high-interest debt. The reverse will gradually reduce your net worth. But don’t sacrifice peace of mind. If you’re in danger of being laid off or expecting a big expense, and retaining cash helps you sleep at night, that’s worth factoring in.
Source: MoneyTalksNews | Brandon Ballenger