Debt Reduction, Avoid Common Money Mistakes and Stay Out of Debt
Filed under: Debt Control — Jean @ 2:23 pm
Experts say there is specific money mistakes that many are likely to make that can easily land you in debt. These are very common errors of judgment that many of us fall into without even knowing it.
Buying a new car
OK, that can easily get you into debt. Sure, you love that new car smell, the feeling that you are the one adding up the miles, but it is a known fact that new cars depreciate thousands dollars within the first year. Think about all that money that you’re paying for the privilege of the new car smell and buy a high quality pre-owned vehicle. Many used cars still carry the original warranty-even more incentive for buying a quality used vehicle.
Using your home equity line of credit to pay off your credit card debt is often described as unsecured debt, because there’s no real collateral that the credit card company can force you to sell in order to collect on the debt. A home mortgage and home equity loan is known as secured debt because your home is the collateral. But if you fall behind your payments, the lender can easily require you to sell your home in order to collect on the debt.
Borrowing from your 401(k) or 403(b). Your 401(k) deals are pre-tax, which means that eventually the money that you put in will get taxed when you withdraw it. Taking out a loan from your 401(k) or 403(b) means that you will be borrowing from pre-tax dollar which will eventually have to be repaid. When you eventually retire and begin your withdrawals, you will be taxed again. If you borrow money from your 401(k) or 403(b), you will effectively be getting taxed twice. Did you know that you are also required to repay the loan in only a few months? If you don’t happen to have the money for repayment, your loan will be treated as a withdrawal. You can expect a whopping 10 percent early withdrawal penalty.
Stay away from buying a variable annuity as you are making a contract with the insurance company and the money is used to buy mutual funds. But did you know that you will have to pay income tax on any withdrawals? Plus, if you withdraw any money from your variable annuities before you are approximately 60 years of age, you will also be penalized with a 10 percent fee. So watch out for what may seem like a great deal on that tempting variable annuity. There are often many buried fees that are attached to variable annuities. Make sure to read all the fine print.
Avoid variable interest loan those low initial teaser rates for financing your new home. If you can’t afford the home otherwise, you should probably not buy the home. Avoid option adjustable rate mortgages too. This will usually cause your loan balance to become bigger each month as they adds the unpaid interest on your balance of the home loan. Think twice about those great introductory rates-they can often turn out to be not that great.
More Information on Eliminating Debt