The 12 Biggest Money Mistakes

Here's a piece from Suze Orman where she lists her 12 biggest money mistakes. She lists them as things you shouldn't do and includes:

1. Don't borrow from your 401(k) or 403(b).
2. Don't use a home equity line of credit to pay off your credit-card debt.
3. Don't fall behind on paying your taxes, student loans, or child support.
4. Don't flake on paying your library fines or parking tickets.
5. Don't buy a variable annuity, especially for your retirement account.
6. Don't finance a home purchase with a variable interest-only loan.
7. Don't miss out on your employer's offer of an annual bonus.
8. Don't purchase life insurance on your kids.
9. Don't purchase life insurance as an investment.
10. Don't let any single stock account for more than 10 percent of your investment portfolio.
11. Don't pass up a Roth IRA.
12. Don't opt for low home- or auto-insurance deductibles.

My thoughts:

I agree with Suze on all of these (to varying degrees). My specific thoughts on each of these are:

1. This doesn't really need any comment other than it's almost always a bad idea to borrow from your 401k.

2. To pay off your credit card, you should spend less than you earn, then use the excess funds as part of a plan to get rid of your credit card debt.

3. Especially your taxes. The government takes a dim view of non-payers and uses lots on muscle to be sure it gets its money.

4. These are relatively minor costs, but they can impact your credit score -- something that could cost you dearly if you are forced to borrow.

5. 'Nuff said.

6. I have my own formula for buying a house.

7. If you're not contributing enough to your 401k to get the entire employer match, you're passing up free money.

8. Yep. See # 3 on New Parents' Top 10 Money Mistakes for more details.

9. Instead, buy term and invest the difference.

10. You need to diversify your investments to spread out risk.

11. If you qualify, a Roth IRA is money in the bank.

12. You should set your deductibles as high as possible (as high as you can afford if you need to use the insurance) to save yourself money and stop yourself from the temptation of using insurance for minor losses.

Comments

[Kurt]

Her argument on #1 is completely wrong. True, you are repaying it with after tax dollars, but ANY LOAN you take out from any location will be repaid with after tax dollars. What's the big deal? She is wrong so often it isn't worth listening to her annoying voice. :-)

[Zums]

No she is right, you are wrong. It's simple ... 1> while the loan is open, you are losing the potential tax free gains the loan amount could be earning and 2> if you change employement, you may have to repay the loan immediately or treat it as a very expensive early withdrawal.

[Dus10]

I have to agree with both posters.

Kurt: This is completely true. That is why it is not a good argument for not borrowing against your 401(k). However, Suze isn't an idiot, by any means.

However, that does not mean there are not other good reasons.

Zums: These are the other good reasons for not borrowing against your 401(k).

My answer to this is the Roth IRA. Contribute, contribute, contribute! If you put funds into a Roth, you can withdrawal your contributions without penalty. I would advise against it unless it was for an emergency or to purchase a home.

That is what I hope to do for my children. When my oldest daughter turns eight (in less than two months), she is going to start working in a new family business that we are starting (this is the earliest age where this becomes viable from all perspectives). She will be putting most of what she earns into a Roth IRA and a Coverdell ESA. The Coverdell ESA will cover her college expenses. The Roth IRA will have an excellent head start on compounding, and she will be able to withdrawal any funds necessary to purchase her first home. However, I hope I give her enough financial acumen that she finds a better way to do this when she reaches that point.

[moom]

From what I understand the money you pay back to the 401(k) will get taxed a second time when you finally withdraw it. That's why this sucks.

[Steve]

If you have a loan to be paid and you are not going to borrow from 401k, then how exactly do you plan to pay the loan?

[FMF]

Spend less than you earn creating extra cash flow. Isn't that how most people do it?

[steve]

And keep paying high interest rate finance charges too?

[Russ]

If you take a loan from your 401k you pay tax on your payments, you get taxed when you finally take the proceeds out (assuming you don't die first), but you pay any loan interest to yourself. Before 401k reforms made after the Enron fiasco (choices other than company stock being mandatory) it made sense for some people to take out loans whenever they could just so they could reduce their exposure to their company stock. That's moot now unless your investment choices suck.
So, is it good or is it bad - depends.... But I certainly wouldn't make a blanket statement declaring that it's the worst thing anyone can do.