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ICFE
ICFE eNEWS #19-22 - July 18th 2019

The 9 Top Money Mistakes People Make (Part Two)

By Jim Garnett, a/k/a Ask Mr.G, a member of the ICFE's Board of Educational Advisors

Recap From Part One:
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 person defaults.

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 credit.

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.

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.
Ask Mr. G
Jim Garnett, The Debt Doctor
AskMrG Consulting, LLC
2216 SW 35th Street
Ankeny, IA 50023
515-577-1799
askmrg@yahoo.com
AskMrG.com

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Sent by:

Paul S. Richard
President - Executive Director
Institute of Consumer Financial Education (ICFE)

About the ICFE:

The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation and founder of the College for Financial Planning in Denver, CO.) The ICFE is dedicated to helping consumers of all ages to improve their spending practices, increase savings and use credit more wisely.

The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its financial continuing education courses programs and resources. In addition to eight Certification courses covering identity theft, credit files, credit repair and credit scoring, among others, it also publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.

The ICFE is a partner with the national Jump$tart Coalition for Financial Literacy and the California Jump$tart chapter. The ICFE staff is also active with San Diego Saves and Military Saves, both offshoots of America Saves.

The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.

The ICFE helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G library, a free eNews service, and an online resource center for students, parents and educators, plus financial education learning tools in the ICFE Book Store.

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