ICFE eNEWS #19-22 - July 18th 2019
The 9 Top Money Mistakes People Make
By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors
Recap From Part One:
Get questions like this one answered in my new book, The
Nuts and Bolts of Cash and Credit: An Encyclopedia of Financial
Knowledge" on Amazon.com.
Money Mistake 1: Being Comfortable With Debt.
Money Mistake 2: Not Knowing What We Spend Each Month.
Money Mistake 3: Behaving Like Credit Cards are Money.
Money Mistake 4: Being Satisfied To Make Minimum Payments.
Money Mistake 5: Borrowing to "pay off" debt. Borrowing
to pay off debt normally backfires! It has similar results to
digging a hole in our front yard so we can fill in the hole in
our back yard.
This "money mistake" yields some pretty disastrous results:
• Our borrowing does not actually "pay off" debt – it merely
moves the debt to a different location. Now we have a 2nd
mortgage on our home or a loan against our 401(k).
• The debt we pay off by borrowing usually reappears within 3
years. This occurs because our borrowing makes it unnecessary to
change our spending habits.
• Borrowing against our home equity turns an unsecured debt into
a secured debt. That's why the interest rate is now less – the
bank would rather loan against our house than loan against our
name because it is less risky.
• Borrowing against our 401(k) often has a 10% penalty if we are
not 59-12; years old, plus the monies we borrow are taxed as
income. At times, 40% of the monies taken from a 401(k) loan
will "disappear" in penalty and taxes.
• If we move again, our house produces very little profit
because we have increased the mortgage balance, plus there is
little to put down for a down payment on our new home.
• When we are old enough to retire, we often cannot because our
home is not paid off. We still have house payments to make
because we borrowed against it to "pay off" debt.
Borrowing to pay off debt does not decrease our debt, and often
we are worse off than we were before.
Money Mistake 6: Co-signing a loan. It's
great to help somebody get a loan, but it's critical to
understand the risks before doing so. There's a reason the
lender wants a cosigner: The lender isn't confident that the
primary borrower can repay in full and on-time. If a
professional lender isn't comfortable with the borrower, you'd
better have a good reason for taking the risk. Lenders have
access to data and extensive experience working with borrowers.
The co-signer promises to repay the other person's debt if, for
any reason, he does not. The liability assumed is for 100% of
the debt, thus, if $5000 is the total amount borrowed, the
co-signer is responsible for the entire $5000 if the other
Also, the co-signer's credit score can be affected if the
primary signer makes late payments or misses payments on the
loan. Presently, 75% of student loan co-signers end up making
payments on the student loan.
Money Mistake 7: Having no emergency savings. A
recent survey asked people if they could get $2000 for an
emergency. The results revealed that 55% of the respondents said
they could get the money within 30 days, but 92% of those people
said they would need to borrow the money from family, friends,
bank loans, or credit cards.
Another survey revealed that 28% of the 1000 people surveyed
have absolutely nothing in savings. In other words, many people
are simply not prepared for emergencies.
Money Mistake 8: Creating debt for tax benefits or to establish
Debt for Tax Benefits. It
is good to claim every deduction that you can on your taxes, but
it is often not good to spend money in order to get a tax
deduction. An example would be the deduction one is allowed to
take for interest paid on a mortgage loan. If I paid $10,000 of
interest and was in a 25% tax bracket, I would receive a tax
deduction of $2500. If I absolutely had to pay the interest, I
would surely deduct it. But if I had the choice of paying my
home off and having no interest to pay, that would be my choice
by far. I would far rather have the $10,000 non-spent money in
my hand than receive a $2500 tax deduction. I may pay more tax,
but on the other hand, if I gave monies to charities, I would
receive the same deduction. Remember, you often have to spend
your money to receive tax deductions. If you are not careful,
you can "tax deductible yourself into the poor house."
Debt for Establishing Credit. One
of my clients followed the advice of her financial counselor and
bought a house in order to build up her credit score! In order
to establish credit, you simply need to pay your bills on time.
You do not need to maintain debt to do this. You can establish
your credit just as well by paying your credit card balance in
full each month.
Money Mistake 9: Thinking that good credit is the most important
thing in life. Good
credit is important, but it is not the most important thing in
life. The main benefit of having good credit is being able to go
into debt with good terms. But what if we decide we are not
going to go any further into debt and work out a plan to get out
of debt and stay out of debt? Then the benefits of good credit
are not nearly as important to us.
To me, the benefits of living debt free are much more important
than the benefits of having good credit. It is true that most
people who live debt free also have good credit, but it was not
their good credit that allowed them to become debt free. It was
their living within their means and discontinuing the use of
credit to create any further debt.
Please do not misunderstand. I am certainly not advocating that
one should have bad credit. I am simply stating that getting out
of debt and staying out of debt is much more important than
having good credit.
Conclusion: The wise person learns from the mistakes of others,
especially money mistakes. Doing so enables us to learn the
valuable lessons from "the school of hard knocks" without having
been a student.
© Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023