Financial mistakes

We are starting out a new year and want to avoid financial mistakes. Here are some financial mistakes you need to ensure that you do not want to do:

1. Too much student loan debt: When you take on too much student loan debt, you are going to have a heck of a time paying it off. Some of you might defer the loan, which lets you postpone paying on it. However, the loan continues to grow. Make sure you avoid student loans, especially private student loans. Seek out scholarships, work part-time, or postpone college and work full-time, so you can save to pay for college. Getting a degree and having thousands of dollars in student loan debt makes you feel overwhelmed. If you must take out student loans, take Federal Student loans and only take out what you reasonably expect to earn your first year. You are not going to get a six figure salary when you graduate, so don’t have a six figure loan.
2. Pay only the minimum payments on your credit cards: Paying only the minimum balance on your credit cards will drag out the time you pay on the debt. You’ll be paying a long time for something that will be long gone by the time you pay it off. Only pay the minimum when you are using the debt snowball to get out of debt. Remember that with the debt snowball you concentrate on paying off the debt with the highest interest rate first and pay the minimum on the lower interest rate debt. When that debt is paid-off, you go onto the next debt and add what you were paying on your first debt to that minimum payment. You’ll keep doing this for each debt.
3. Taking a loan from a retirement account to pay off debt: By taking out a loan from your 401(K), your IRA, 403(B), or any other retirement account, you are going to have to pay a 10% tax penalty on it,unless you are 59 1/2, and you are going to pay ordinary income tax on it as well. Therefore, if you $20,000 dollars and you take that out of your retirement, you’re going to pay a $2,000 penalty plus income taxes depending on your tax bracket. Also, you are taking out tax-free money and repaying it with taxed money.
4. Buying too much of a home: We all want nice homes, but we need to be careful when we buy our home. You don’t want to house poor. This means that the majority of your money is going to making house payments and your other living expenses are being short-changed. Before you buy a house, make sure you can cover the closing costs, that you have 20% or more to put down on the home. Your housing expense, this includes mortgage, interest, insurance, taxes, upkeep, higher utility bills, etc., should be between 25% to 35% of your income.
5. Cosigning a loan: This one is something that many people struggle with, especially parents when it comes to their children. You want to help out your friend or your relative. Remember the bank or financial institution has turned them down for a loan. They, the experts, have deemed them to be a high-risk borrower. The experts have determined there is a very high probability that they will default on the loan. This is the reason they want a cosigner. When the financial institution has someone with an excellent credit rating as a cosigner, they know that once the default occurs, they’ll get their money from the cosigner. You might feel that you know your child, brother, sister, mother, father, relative, or friend better than the financial institution. However, when it comes to money and borrowing, trust the experts and don’t cosign. Look at Proverbs 6:1-5  -“My son, if you have put up security for your neighbor, if you have shaken hands in pledge for a stranger, 2 you have been trapped by what you said,ensnared by the words of your mouth.3 So do this, my son, to free yourself,since you have fallen into your neighbor’s hands:Go—to the point of exhaustion and give your neighbor no rest! 4 Allow no sleep to your eyes, no slumber to your eyelids.5 Free yourself, like a gazelle from the hand of the hunter,like a bird from the snare of the fowler.”
6. Not having a living revocable trust and will: If you don’t want the state allocating your assets or finding a suitable person to raise your children, you need to have a will and a living revocable trust. The trust eliminates probate and your descendants, named in the trust, get the assets you want them to have. Your children avoid costly probate. You also need to insure you have a Durable Power of Attorney, Healthcare Proxy, and Medical Directive.
7. Not getting long-term care insurance (LTC): None of us going to stay young forever. When we age we become more likely to need nursing home care. If you do not have LTC insurance, the nursing home care costs are quickly going to eat-up your assets. Get LTC insurance when you are in your 50’s or 60’s. Sometimes getting it in your 40’s is a good idea, because as you age more illnesses kick-in and you might not qualify for LTC insurance.
8. Saying “yes” when you should be saying “no”: This goes right along with number 5. We have a hard time saying “no” when someone asks us for money. If you don’t have the money to give them, don’t be afraid to admit it and tell them “no”. If you need the money to buy food, pay rent, or buy gas for your car, why are you going to give the money to your friend to pay his credit card bill?
9. Borrowing against your home: Never use a secured asset to pay for an unsecured debt. When you borrow against your home through a home equity loan or a home equity line of credit to payoff your credit card debt, you now have the risk of losing your home if you are unable to payoff the loan. You have pledged your home for the loan. With credit card debt, nothing is pledged against the debt. The credit card company cannot foreclose on your home if you are unable to pay the debt.
10. Taking money out of savings to invest in a get rich quick scheme: This one is just plain stupid. Get rich quick schemes do not work. The only person that gets rich quick form these schemes is the person running the scheme. They get your money.
11. Borrowing money to invest: You do not ever want to borrow money to invest in the stock or bond markets. You might get lucky and get an investment with a nice return. However, taking an advance on your credit cards is costly in interest and in fees. Instead, do dollar-cost-averaging when you invest. This means that you invest the same amount money each time over a long period of time. You are going to be investing when the market is down and when it is up.