What Not to Do With Your Finances in 2006
- 2006 6 Feb
If your To Do List for the New Year already has you in a state of overwhelm, take a deep breath. Relax.
There are a few things you can put on a Do Not Do List.
Do not close multiple credit-card accounts. If you’d predicted that in 2006 I would be advising you to not close all but one of your credit-card accounts, I would have said you are nuts. But you’re not and I am. Advising you, that is.
Times have changed and while reaching $0 balance on all of your
credit-card accounts is a major tenent of debt-proof living, closing a number of accounts at the same time can wreak havoc on your credit score. It is true that having too much available credit is not good for your credit score. But once you have multiple accounts, closing them does not undo the damage. And closing several in a short period of time may make things even worse.
Best advice: Stop using all but one account by cutting up the cards so you are not tempted to use them.
Do not make PIN-based debit card transactions. A PIN-based debit card, sometimes called an ATM card, requires a personal identification number or PIN, to complete a transaction. The money is deducted from your checking account immediately.
A "signature-based" debit card with a MasterCard or Visa logo is similar to a credit card without the credit. You can sign for your purchases and the money is debited from your checking account within two to three days.
One recent survey shows that 89 percent of banks now charge a fee ranging from 25 cents to $1.50 for each PIN-based transaction, and often without warning the consumer. And the trend is spreading.
Best advice: Always opt for a signature-based transaction. Press the "credit" key, sign your name on the receipt and no fee is charged.
Do not choose college savings over retirement funding. Retirement preparation, says Liz Weston author of Deal With Your Debt (Pearson, 2005), needs to be a high priority for almost everybody. It should take precedence over just about every other goal — including your child’s college fund. Her reasoning? If worse comes to worst, your kid can borrow money for school. No one will lend you money for retirement.
Best advice: Put funding your retirement at the top of your financial goals.
Do not prepay your mortgage while you have other debts. If you have credit-card debt, student debt, car debt or any other kind of debt and are paying more on your mortgage each month than the required payment, you’re paying off the wrong debt. Because mortgage interest is deductible on your tax return, the effective rate is likely 4.5 percent or less depending on your tax bracket. It is likely your cheapest debt and becomes cheaper as time passes because of inflation.
Best advice: Make your mortgage the last debt you pay off.
Do not borrow from your 401(k) or other retirement accounts. Of course you know that cashing in a retirement account prior to the approved age is not anywhere close to being a smart move. The penalties plus taxes that become due are just too steep. But borrowing from that account seems to many people to be a wise move. The rationale is that because you are borrowing your own money, you’ll be paying yourself interest. But that is not smart, either.
If you leave that job for any reason, the loans becomes due and payable. If you can’t come up with the cash, the balance on the loans will be considered a cash withdrawal, and you’ll owe a ton in taxes.
Then there’s a matter of double taxation. The money you put into a 401(k) is untaxed. But if you borrow, you have to pay back with after-tax dollars. And guess what? When you withdraw those taxed dollars later during retirement, you’ll have to pay tax on them a second time.
Best advice: Think of your retirement account as out of reach for now. Make your deposit automatic then just forget you have it.
Do not use your home’s equity as an ATM machine. Can you imagine your grandparents walking into the bank and asking for a second mortgage on their home so they could take the kids to Disney World or make sure Susie has the wedding of her dreams? Or they tap the equity to pay off credit-card debt or to buy a car. Probably not, but that’s so common today it’s considered almost normal — the right thing to do.
The equity in your home is one of the best (perhaps the only) appreciating assets you will ever know. If you are forever drawing it down you’re shooting yourself in the financial foot. One of your long-term goals is to achieve 100 percent equity. That’s the day you get to burn your mortgage because you own your home free and clear.
Best advice: Keep your hands off your equity. Just let it grow so that one day you can give yourself the best gift of all: Rent-free retirement
"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates. Click here to subscribe.