Fifteen Dumbest Money Moves
Tip It!CNN/Money has compiled a list of fifteen of what they consider to be especially dumb money moves, along with a smart(er) alternative for each. Have you committed any of these monetary sins? Read on to find out…
1. Putting all your eggs in company stock
2. Cashing out your 401(k)
3. Buying an investment you don’t understand
4. Not checking out your financial advisor
5. Saving for your kids’ education instead of your retirement
6. Buying last year’s top performing mutual fund
7. Buying tax-free bonds and variable annuities for your IRA
8. Stretching out loan payments (40 year mortgage, anyone?)
9. Making small insurance claims
10. Applying for more than two credit cards
11. Buying life insurance on your kids
12. Getting a tax refund
13. Job hunting at work
14. Paying retail right off the bat instead of shopping around
15. Prepaying for a tank of gas when you rent a car
I’m not sure that I agree with #10, as I’ve had great success taking advantage of generous credit card offers (for example here, here, and here) and my credit score remains >770. I can, however, see the concern for people who don’t use their head.
I also don’t totally agree with #12. While I’m well aware of the underlying logic, I also read a study awhile back that claimed that the best way to stimulate the economy is to increase people’s take home pay slighly each month as opposed to providing them with a lump sum. This was part of a criticism of Bush’s plan to get the economy back on track a couple of years ago with the mid-year Child Tax Credit checks. The concern was that, by sending out big checks, people might end up being responsible with the money and saving it rather than pumping it back into circulation. In my view, the same logic should apply for tax refunds. While you forego a bit of interest during the year, tax withholding is essentially an enforced savings plan. Depending on your personality, this might be the best way for you to accrue a decent chunk of money over the span of a year. If, on the other hand, you wanted to avoid giving the government an ‘interest free loan,’ you’d end up with a small amount of additional take home pay each month, but you might spend it on little stuff rather than saving it. Of course, if you’re the type that blows their tax refund when it arrives, then all bets are off.
Published on June 7th, 2005 - 6 Comments
Filed under: Miscellany
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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6 Responses to “Fifteen Dumbest Money Moves”
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June 8th, 2005 at 4:56 am
Hmm…I’d have to dispute #15, too. Or am I missing something sinister about saving 20 cents per gallon off the prevailing rate for gasoline?
June 8th, 2005 at 7:27 am
The biggest problem with #15 is that most people don’t return the car with a near-empty tank. Right now, a $0.20 discount is only around 10%. Unless you run the tank way down, you’ll come out well ahead if you just fill it back up yourself before returning it. If this was an overall win for the average consumer, as opposed to a cash cow for the rental agencies, they wouldn’t push it so hard.
June 15th, 2005 at 4:50 pm
I strongly disagree with the second part of #7. I know that Suze Ormann has been beating this drum for a long time, and variable annuities ARE more expensive than most investments, however –
Why is it that nobody ever talks about the benefits to owning an annuity ASIDE from the tax deferral aspect of them. Most annuities now offer guarantees that your investment will never be underwater with all of the upside (minus the 2-3% fees) of the market returns for you to use as a living benefit in retirement, or for a death benefit for your heirs should you never use the money. If the market returns 20% next year, and I only see a 17% return after fees, will I be unhappy?? Probably not. And if the market returns -10% next year, I know that I will always get all of my money back. So my next question is, Why does it matter if it’s qualified or non-qualified money in my annuity?? I’m not doing it for the tax deferral, but rather for the protection in a turbulent market.
June 15th, 2005 at 8:44 pm
Right, but if you have the ability to both fund both regular old investments and tax-advantaged bonds and/or annuities, then it wouldn’t make sense to put the tax free stuff in an IRA. Might as well leave that out in the open and put your taxable investments in the IRA. The issue of whether or not annuities are a good investment is another argument entirely.
June 15th, 2005 at 11:50 pm
#8 is too general. Sometimes it is good to stretch out repayments. For example, student loans can now be consolidated at less than 3%. The first $1500 of interest is tax deductible, giving you an after tax cost of funds of about 2.25% if you are in the 25% bracket. You are better off stretching out the debt as long as you can, while investing your cash in higher yielding investments.
June 16th, 2005 at 12:52 am
Here’s one I would add: borrowing from your 401k/RRSP for a mortgage down payment. It is allowed by the feds in Canada and the US, as long as you pay it back with a set number of years (15 in Canada), but for that term the money you borrowed is not working for you, and the benefit of compound interest is lost when you get the money back in 15 years down the road (or over the 15 years, you know what I mean).