I did a lot of stupid things with money when I was a younger. In fact, I still make mistakes. We all do. But some mistakes are worse than others. This morning’s USA Today features an article that highlights eight money missteps that can really hurt you financially. Author Kathryn Canavan highlights eight economic deadly sins:
- Raiding your retirement accounts. I get a lot of e-mail from readers who want to generate quick cash by borrowing from their 401(k) or withdrawing the contributions to their Roth IRA. Most financial advisers warn against this, and I think it’s a bad idea, too. I’ve heard plenty of horror stories from folks who borrowed against their retirement only to have something go terribly wrong. It’s best to save your retirement funds for retirement.
- Walking out on a mortgage. “If you owe more than your house is worth, walking away is not your only option,” writes Canavan in the article. “For information about modifying your mortgage, go to MakingHomeAffordable.gov, a website sponsored by the federal government with the goal of helping the 12 million American families whose homes are now worth less than they owe.”
- Using credit cards to finance a lifestyle you cannot afford. This is the deadly sin I feel victim to when I was younger. I wanted everything, and I wanted it now. Rather than wait until I could pay cash, I financed my lifestyle on credit. Now, many years later, I’m finally using credit cards again. But I use them because I can pay cash, and not because I can’t.
- Falling for debt-consolidation schemes. When you’re deep in debt, it can be tempting to look for magic bullets. Those debt-consolidation schemes you hear advertised on the radio can seem so tempting! Who wouldn’t like to get rid of their debt all in one blow? But these plans aren’t magic bullets, and as my little brother learned, they can actually make matters worse. If you need help with your debt, find somebody reputable who can help. (Check with the National Foundation for Credit Counseling.)
- Co-signing a loan. I know, I know: You want to help your boyfriend or your sister or your son. And they promise they’ll change their ways and pay you back. But be careful. When you co-sign on a loan, you’re making a legal commitment, and if something goes wrong, you may find that you’ve not only lost money, but you’ve also lost a friend.
- Taking out a payday loan. Payday loans are a trap. They’re a stopgap measure that often snowballs for folks who use them. Usually, they just sink people deeper into debt.
- Using a reverse mortgage. A reverse mortgage isn’t necessarily evil, but it’s absolutely not a cure-all. In fact, reverse mortgages are suitable for only a very small portion of the population. As the article says, a reverse mortgage should be “a last resort, not a first resort”.
- Cheating on your taxes. Nobody likes paying taxes. But despite what your Uncle Joe might tell you, you are obligated to pay them. If you want to protest taxes, talk to the media or your legislators. Don’t take it out on the IRS, and don’t try to cheat.
Even during my worst years, I was able to avoid most of these mistakes. Although I was sorely tempted to cash at my retirement savings at one point, I never did. Instead, my biggest problem was using credit to finance a lifestyle I couldn’t afford.
Still, I know plenty of people who have committed more than one of these financial deadly sins. My younger brother has been guilt of many, though I’m hoping that he’s ready to turn things around. When he’s back on his feet, the advice I’ll give him for avoiding these problems in the future will be to become better educated and to prepare for trouble in advance. Education and preparation go a long way toward preventing financial mistakes.
[USA Today: 8 money missteps that can hurt you financially]
This article is about Choices, News, Odds and Ends
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Kevin @41, first, as has been pointed out elsewhere, banks and financial companies have no problem whatsoever ‘breaking their word’ and walking away from a bad financial deal, yet turning around and insisting that consumers suck it up and Do The Right Thing. And in fact, those people ARE keeping their word. The deal is, you pay off your mortgage, and if they do not, the bank forecloses and takes the house. Walking away is saying “Okay, go ahead and take the house.” If the homeowner packed up the house in the middle of the night and took it to Mexico where the bank couldn’t find it, you might have a point.
You’re also confused about why people walk away; it’s not because of declining property values but because of an inability to pay the mortage OR sell the house. A lot of people signed up for loans that would eventually become unaffordable to them on the assumption, which almost everyone in the housing and mortage industries believed (or claimed they did), that real estate would always go up. Therefore, it didn’t matter if your mortage payments doubled in five years, because before then you could easily turn around and sell the house for more than you paid for it. Suddenly it turns out that people can’t afford the mortgage now (especially if they’ve lost their jobs) AND nobody wants to buy their house.
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Exactly. What rule are these folks breaking? They are allowing foreclosure to occur, which is how mortgages work.
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@Kat — Ah, true, I misread. Still, it’s a two-column accounting nightmare.
I think you’re assuming too much when you say most of us would agree that walking away from an underwater mortgage is wrong. It’s a contract, pure and simple–completely amoral. If the contract is broken, the bank is entitled to its collateral…in this case, a house. There is nothing wrong, shameful, or immoral about breaking a contract, it’s just that in most cases it’s not a good idea. This is the exception.
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@JB:
“There is nothing wrong, shameful, or immoral about breaking a contract”
Wow. Ladies and Gentlemen, welcome to the new reality. Our grandparents would be so proud to hear us say stuff like that.
The Founding Fathers must be rolling over in their graves. If only they could have seen a future in which people calmly proclaim that “There is nothing wrong, shameful, or immoral about breaking a contract.” I’m in shock. I don’t really know what else to say about such an outrageous comment.
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Kat made a great point:
“If you bought a house with cash, and the value went down, would you go back to the sellers and demand they pay you back? Yet because you borrowed the money, you think it’s okay to not pay it?”
Well said. To all walk-awayers: You bought the house. You decided that it was worth $300,000. If you thought it was overpriced, you shouldn’t have made the offer. You were responsible for setting the sale price of the home.
It’s completely irrelevant that 2 years later, other people think you overpaid. They’d only be willing to pay $200,000 for your house. So since other people think you overpaid for you home (which you’re not even trying to sell!), that makes it OK to try and weasel your way out of a loan? The bank that lent you the money had nothing to do with determining the sale price. How does screwing over the bank (and their shareholders) make it OK? What did the bank have to do with setting the price? YOU are the one who ultimately decided you felt the house was worth $300,000. That’s why you were the winning buyer in the first place, and not someone else who thought it was worth less!
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Does raiding your retirement accounts include lending the money back to yourself for a down payment on a house?
In Canada we have something called the Home-buyer’s Plan where you can lend your RRSP (401K) to yourself at zero-percent interest as long as you pay it back within 15 years… thoughts?
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In addition to the tax penalties of foreclosing, lenders can also come after you for the difference in value.
http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/
So perhaps not such a good financial move anyway, regardless of the morality, depending on what rules you are governed by.
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It is a shame that being greedy and not keeping your word is not considered “wrong, shameful, or immoral.” No wonder we ended up in this financial mess.
And JB, I said that most people WHO THINK that is it wrong to walk away because your house is underwater WOULD ALSO think it is wrong when banks default. NOT “most of us would agree that walking away from an underwater mortgage is wrong.” I have no idea the percentage of Americans that think you should walk away if your house is underwater. I was using logic that people who think one is wrong would think a similar situation is also wrong.
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@Kevin #45
“You’re telling me that this condo has dropped from $350,000 to $150,000? That’s a loss of 57% of its value. If that’s what you’re trying to claim, then I’m sorry, but I call shenanigans. Sure, house prices have sunk terribly, but there’s no way a condo anywhere in the US (not even Florida) is currently worth 57% less than it’s 2005 value. Maybe it’s dropped close to that much from a peak value (which would have been in 2007/2008), but prices were still climbing in 2005. He didn’t buy at the peak. There’s just no way. Your friend is exaggerating.”
Hi from someone who LIVES IN MIAMI. Condos have dropped more than 50%. I bought a townhouse in early 2006 with a purchase price of $230K. They are now selling for $75 – $100K. You do the math. That’s a townhouse. Condos down here are in far worse shape.
P.S. I am SICK of the mortgage topic.
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Thank heavens I’ve only committed one of these- using credit cards to finance a lifestyle I didn’t need/ couldn’t afford. I’m still on baby step #2, but plugging along.
When I was 22, my dad co-signed on my first car- the cutest little convertible Geo Metro. At the time, he said something totally out of character for him, “You better pay every payment on this car.” It hurt my feelings, because it never crossed my mind not to pay my own payments, but five years later I had paid every penny.
Funny what 18 years will do- During our divorce my parents offered to co-sign on my mortgage in order to get the house in my name. Thankfully, I didn’t need them to, and have once again paid every penny myself!
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@Nicole — actually, lenders being able to seize other assets varies by state. Of course, nobody should walk away without consulting with a good bankruptcy attorney, and a short sale or a loan modification is always a better option, if it works.
But still–why all the anger at borrowers? They’re the ones getting exploited.
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Hi Madeline,
Thank you for verifying the situation. As I said, most people in most of the country have NO IDEA how bad certain areas and certain types of property have been hit. I certainly can’t prove that this person I am referring to is telling the truth, nor do I really feel the need to. If you have been reading the newspaper at all in the past year and focusing on articles about certain areas of AZ, CA, FL and elsewhere, you would not be shocked or “call shenanigans” on this reality.
And to those of you who think that all these people should just suffer through their “bad” (how were they supposed to predict a more than 50% drop?) investments for years to come, I really have nothing else to say.
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@Jane:
“And to those of you who think that all these people should just suffer through their “bad” investments for years to come, I really have nothing else to say.”
Jane, how are they “suffering?” They’re living in the house they wanted, paying the mortgage they felt was perfectly fair just 2 years ago.
Now, all of a sudden, they’re “suffering?” Nothing’s changed! It’s the same house, it’s the same mortgage – but somehow they’re “suffering?” Why? Because of what a bunch of other homebuyers think? They’re not even trying to sell their house! Why do they care what other buyers think? Just 2 years ago, they agreed to pay that mortgage for 30 years! What changed? Why do they suddenly feel like they should be given a free pass and let out of the contract they willingly agreed to so recently?
It’s an entitlement attitude, and those of us who act responsibly are getting pretty sick of it.
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Jane, as you said that they bought a starter house, and not a rental property, I would assume your friend purchased their home. A home is not the same as an investment. Everyone that invested in stocks will suffer through the bad years. Some have had a 50% drop and will just have to deal with it until it turns around. Why shouldn’t your friend? That’s the nature of investing, there are always going to be good years and bad years. It’s not like they are homeless, they just wish they had an extra bedroom and bathroom, or whatever their complaint is why 1000square feet isn’t enough.
JB, it’s anger at everyone who is making this financial mess and making it worse. Yes, banks exploit. So, we should work to STOP them from exploiting, not exploit them back. Borrowers who default when they didn’t have to or have a sense of entitlement that they shouldn’t be the ones taking the loss are making this financial mess worse.
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Yes, sometimes you do have to suffer through your “bad” investment choice for years to come. There are absolutely no guarantees in life except death and taxes. Sometimes we play and win and sometimes we play and lose big time. It’s called life!! So you didn’t plan on staying in your condo or whatever this long? Well boo hoo for you. Time to pull up the big girl panties.
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Kevin said “It’s an entitlement attitude, and those of us who act responsibly are getting pretty sick of it.”
“Entitlement attitude” sounds like one of those code words that has a whole lot of assumptions and connotations rolled up into it.
Call it what it is. Home owners who could afford the mortgage before, but who demand their mortgages be lowered because their housing prices declined are simply greedy and unethical. They signed a contract to pay X to get the house, they are still able to pay X so they should do so.
That’s like saying that my stock investment that I bought at the height of the market is now worth half, and somebody else is able to buy twice as much stocks as I did, I should now get a refund for the difference. It’s just greed.
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@61… yes, that’s why I said “depending on what rules you are governed by.” State differences are also addressed in the article.
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@Mel and J.D., I “needed” a co-signer, but I didn’t get one because my parents went bankrupt when I was in college. Fortunately, my parents were still able to help me by letting me move back home with them for free. Then I got a full-time job within walking distance. When I had saved enough money, I got a car. Then I was able to get a better-paying job that was farther away. Then I was able to afford to move out.
And on home loans, Kevin (#55) says, “What did the bank have to do with setting the price?” I’ll tell you what my bank did. They forced me to pay for a professional appraisal. If my house had been appraised at less than the amount I had offered, my bank would not have been willing to give me such a large loan. (Coincidentally, the appraisal showed that my house was worth exactly what I offered. Yeah, right.)
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I agree with Kevin and Kat, both about their feelings on the mortgage issue and on this quote – “There is nothing wrong, shameful, or immoral about breaking a contract”. Good points about cars. Your car is worth less than you paid for it the second you drive it off the lot. So can you park it in the street and demand the difference back?
“@Samantha
No one is saying these people are miserable or that their situation is akin to the tragedies of others who lost their jobs or can’t afford food or essentials. You can always find someone who is worse off. But I can also feel empathy for people who bought a home in good faith that they could afford only to see that home lose half its value. If you don’t think that situation sounds unfair or unfortunate, even if they can afford it, then I don’t know what to say.”
Certainly, it’s unfortunate, in the way that spilling coffee on your shirt is unfortunate. But I wouldn’t say that if that happened, you should get to steal another shirt. An imperfect analogy but I think you get the point. There’s nothing UNFAIR about buying a house you want, with a mortgage you can afford, and then not being in a financial position to move out of it 5 years later.
@51 mythago
“A lot of people signed up for loans that would eventually become unaffordable to them on the assumption, which almost everyone in the housing and mortage industries believed (or claimed they did), that real estate would always go up”
If they believed that real estate would ALWAYS go up, they deserved what they got.
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@26 Jane – Some people have been brutal with comments… I’d like to suggest that your friends in Miami try to find renters for that place if they’re ready to move on. They could rent a larger place if they feel they need to until the market turns around. Or, they can short sell and move on.
@56 Aaron – U.S. Federal employees have this option as part of their TSP retirement plans (similar to a 401k), where home loans can be given out at a low rate (currently 3.5% or so). The loan repayment and interest go back into the employees TSP plan.
The biggest down side is that the money pulled out misses the opportunity to grow at a rate greater than the loan interest rate. The good news is that it’s a guaranteed 3.5% (or so) return on that money even if the market has a bad few years following taking out the loan.
Regardless, it’s a much better option than pulling completely out of a 401k, because of the tax and penalty problems associated with premature 401k withdrawals.
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Ah I love the morality argument! Only the little folks are responsible for being moral, of course.
I’ve been pretty darn responsible in my life, like I said, I have never bought a house and don’t intend to in the near future either, because it’s too risky for our income. That doesn’t mean that I feel like a sucker because some people walk away from their homes.
Let’s get rid of the mortgage interest tax deduction. That will solve real estate purchase bubbles AND the deficit in one shot!
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Ms. Clear, I have said the entire time that banks should be responsible as well. If we are this unethical with our personal contracts, why wouldn’t we also be MORE unethical with business contracts? Fighting banks exploiting people by exploiting the banks is just increasing the problem, not fixing it.
I agree with you about the mortgage interest tax deduction!
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“And to those of you who think that all these people should just suffer through their “bad” (how were they supposed to predict a more than 50% drop?) investments for years to come, I really have nothing else to say.”
how about those of us that bought stock funds in our 401k plans? they have to suffer through their bad investment for years to come after nearly unpredictable 50% drop.
that said, i’ve seen on the news that some neighborhoods have become ghost towns. you can bet if my neighborhood became a crime ridden barren wasteland, i’d drop that mortgage and move as fast as i could.
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You obviously have no understanding of contract law, then. Your mortgage has very clear terms: you will make defined minimum payments and pay a defined rate of interest on the money you borrowed, or else the bank can seize your house. And yes, cars are another example. If you don’t make your car payments, the bank will reposess your car. There is nothing illegal about it.
As far as moral arguments, well, you can should all over the thread if you want but at the end of the day, business is business and trying to do the “right” thing usually means getting the short end. Banks assess risk when they loan money, and structure loans accordingly. The risk of default is factored into the interest you pay and the mortgage insurance you buy. In other words, the bank has already looked out for its own interests when it loaned you the money. You can either pretend the bank is your best friend and try to do right by them, or you can admit that a bank is a business that is doing what’s best for itself, and try to do the best for yourself within the terms of the mortgage and the law.
Usually, it’s in your best interests to keep paying your mortgage if you can. However, for a lot of people it isn’t in their best interests right now.
It’s similar to businesses which declare chapter 11 bankruptcy when they get too deep in debt. If you owe tens of thousands of dollars more than your house is worth, why wouldn’t you default? The bank would. If your answer is that you’re more “moral” than a bank, well, the answer is really that you’re not as financially astute.
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@Aleks:
“If you owe tens of thousands of dollars more than your house is worth, why wouldn’t you default?”
Because I didn’t buy my house to be an investment, I bought it to live in. I was willing to pay $x to live in it, so I borrowed the money and that’s what I’m doing. Someday I’ll have paid back all of the money, and I’ll keep living here.
What other people think it’s worth is irrelevant.
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I “raided” my 401k and have no regrets at all. I was one of those who lost 50% of the value…but made most of it back. I was sick of being loaded down with credit debt that we were *slowly* dealing with. My peace of mind is worth a lot to me. Lack of stress is worth a lot. Turns out it was worth more than the money i cashed out of my 401k. Did I take a big tax hit? Damn straight. Was still worth it. It was my money…why should I feel guilty for using it? No regrets at all. A ton of stress disappeared. I can save the money up again.
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“I don’t own a home, but I don’t know why people expect those who are underwater to stick around for moral reasons, when banks routinely walk away from deals that are no longer profitable, to get the loss off their books. ”
Because two wrongs don’t make a right? Because some people value their integrity over sticking it to the man?
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To the person who calls shenanigans on homes being underwater by 50% or more…I live in Phoenix. I bought a townhome in 2005 in a nice, established neighborhood. I paid 185K for it and thought myself smart at the time to be getting into the housing market before it went to the stratosphere.
However, as Yogi Berra once said, “Predictions are hard to make, especially when they’re about the future.”
The most recent sale in my townhome complex of a similar unit as mine went for 69K. Do the math. I’m underwater by about 66%. There are five empty units near me. Most of the other units are being rented out to less-than desirable persons.
Here’s the crux of the argument, though: if I can find similar housing for less money, I’m throwing away my mortgage payment, because the difference between what I pay now and what I could be paying could be put to much better use. It’s opportunity cost, the cost of what I could be doing with that money instead of paying down a home that is worth 1/3 of what I bought it for.
I ran some basic numbers, and assuming the 69K price as my starting point, and a modest 2% yearly property appreciation, it would take over 15 years for me to get even with the principal. Note, that is just to get even with the principal, not even back to the selling price.
I never planned to live here for 20 years. As most buyers, my plan was to get a starter house, stay for a few years, then sell for a modest profit and buy a larger house. It is both shelter and investment, and for those of you who say “It’s a house, not an investment,” look back at all the articles from 2005 to 2007 and see how many times a house is mentioned or sold as an investment. (Hint: almost always)
So, even though I can afford my mortgage, although barely, I’m walking. The value between the cost of housing now and what I’m paying is greater than the value of my credit score.
And for those people who make the car argument, you’re really comparing apples to oranges. For one thing, if you move, you can take your car with you. Secondly, yes, you can walk away from the car if you want to. It’ll get repossesed, same as a house. Thirdly, I don’t believe cars are ever sold as investments, at least not the Accord/Camry types. A classic Ferrari? Sure. A new Accord? Unlikely. Fourthly, cars are expected to depreciate in value. With rare exceptions, homes are not expected to decrease in value. Fifthly, most car loans are tolerable since they’re for 4-6 years. A 30-year mortgage for a property that is worth 1/3 what you paid for it? Well, you do the math.
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All these mistakes are sometimes necessary to learn (the HARD WAY).
When people need money FAST, they are tempted to ruin their finances even more without noticing it.
This is specially true with Credit Cards. If we don’t have money, how we will pay for the credit?!?! That is simple logic.
Congratulations on your blog! this is one of my favorites readings.
Cheers!
Alex Wilde.
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Wow, the arguments for being unethical just floor me.
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Look, I don’t own a home, and was warning people about the housing bubble as early as late 2005, but the argument that there is somehow a moral obligation to pay a mortgage does not make any sense to me.
Why should anyone continue making payments on a deal that no longer makes any financial sense when there is a specific legal process laid out in the documents that both the lender and the borrower signed that allows the borrower to stop making payments and forfeit the house?
I’m an honest guy that keeps his word, and I just don’t see how morality even enters into the discussion when we’re talking about mortgage law.
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I completely disagree with your stand on taxes.
It’s a moral obligation to pay as little taxes as you can get away with. The government call it “cheating” but I call it the little man’s fight for freedom.
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@Mel:
“My mom is cosigned on my apartment, my car loan, and my credit card and has been for the last 5 years or so, since my junior year of college when I moved off-campus. If she had not, I would not be able to get an apartment. I would have no car (and hence very limited job prospects). I would have the credit card balance I’m paying off on a much higher-interest card (which was on an account I got in high school, which I also would not have been able to get without her).”
Answer to how you’re supposed to do all that without a cosigner:
-Rent rather than buy (all you need is first and last month’s rent, which is considerably less)
-Buy a used car that doesn’t require a big loan
-Never have a credit card balance you’re paying off and don’t have a credit card in high school
Basically, it would require you to go the cheap route at first and buy expensive things only after you earn money. Delay gratification. That’s why people are seeing it as a moral good.
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