Financial mistakes people make

[disneysteve]

CASHING OUT YOUR 401k: About 60% of 401k participants who leave their job cash out their 401k account. That is a huge mistake on 3 levels. You must pay income tax on all the money. You get hit with a 10% early withdrawal penalty, and you give up the tax-free growth that the money would have enjoyed until retirement. Instead of cashing out, roll over the money into an IRA.

Buying lottery tickets or casino gambling (some will want to add "for any reason other than pure entertainment").

Yep. I would add that there is nothing wrong with gambling if done responsibly, for fun, with money that you can afford to lose. I rarely hear anyone say that it is a waste of money to spend $200 or more to see a 2 hour Broadway show but lots of people say it is a waste to spend that same $200 for a few hours in the casino. My wife and I enjoy visiting the casino. We spent the day in Atlantic City just this past weekend. We lost a total of about $100 in just over 8 hours. I think that is relatively cheap entertainment.

[Joan.of.the.Arch]

CASHING OUT YOUR 401k: About 60% of 401k participants who leave their job cash out their 401k account. .

Really? I had no idea!

[LivingAlmostLarge]

Expecting a large inheritance to bail you out.

[isthisused]

oh, and another one:
not looking after your health. you might think that 80c macaroni and cheese package is cheap and fills you up the same as a couple of bucks more for some proper vegetables and wholefoods , but what exactly is it doing to your insides? sometimes its important to NOT be cheap in some areas.

I added this to Brush and floss

[isthisused]

CASHING OUT YOUR 401k: About 60% of 401k participants who leave their job cash out their 401k account. That is a huge mistake on 3 levels. You must pay income tax on all the money. You get hit with a 10% early withdrawal penalty, and you give up the tax-free growth that the money would have enjoyed until retirement. Instead of cashing out, roll over the money into an IRA.



Yep. I would add that there is nothing wrong with gambling if done responsibly, for fun, with money that you can afford to lose. I rarely hear anyone say that it is a waste of money to spend $200 or more to see a 2 hour Broadway show but lots of people say it is a waste to spend that same $200 for a few hours in the casino. My wife and I enjoy visiting the casino. We spent the day in Atlantic City just this past weekend. We lost a total of about $100 in just over 8 hours. I think that is relatively cheap entertainment.

DS I had a feeling I would get some great stuff from you. The 401k cash out was one of the things I originally planned to put on the list but once I started to build the list I think spaced about ½ the stuff I had. I added your 401K with an addition of my own.
Gambling seems to fall under a category along with eating out and hitting the Starbucks every day for the $4 coffee, going on expensive vacations. (Maybe even buying a new car) These are all great things that might bring enjoyment to a person’s life and in that sence they are not bad, However, If the person is spending on these things at the expense of his secure retirement or protecting his dependants with life insurance or paying off debt , then they are a problem. So finding a good way to word that would be good for the list

[disneysteve]

Gambling seems to fall under a category along with eating out and hitting the Starbucks every day for the $4 coffee, going on expensive vacations. (Maybe even buying a new car) These are all great things that might bring enjoyment to a person’s life and in that sence they are not bad, However, If the person is spending on these things at the expense of his secure retirement or protecting his dependants with life insurance or paying off debt , then they are a problem. So finding a good way to word that would be good for the list

I think that's where "Pay yourself first" applies. I've said many times that 20% of my gross and 50% of my wife's gross goes into savings. We don't budget or nickel and dime how the remainder gets spent. We have no debt except our mortgage. We pay all bills in full every month. It just doesn't matter how the rest gets spent. It might go toward eating out or travel or theater tickets or casino gambling or some other non-necessary expense. As long as all of the necessities, including savings, are taken care of, there is nothing at all wrong with having some wants and enjoying life.

[isthisused]

I think that's where "Pay yourself first" applies. I've said many times that 20% of my gross and 50% of my wife's gross goes into savings. We don't budget or nickel and dime how the remainder gets spent. We have no debt except our mortgage. We pay all bills in full every month. It just doesn't matter how the rest gets spent. It might go toward eating out or travel or theater tickets or casino gambling or some other non-necessary expense. As long as all of the necessities, including savings, are taken care of, there is nothing at all wrong with having some wants and enjoying life.

Yes I agree. Perhaps I should have titled it "mistakes people with financial problems make"

[Ima saver]

We buy new cars. My dh is really into cars and likes to drive corvettes. (so do I) However, we can afford to buy new cars, so I see no problem with that. We still have the first corvette we bought in 1978 and it looks great! I plan to drive it to a car show in April. We cut back on other things that don't matter to us. For me, that is clothes, make up, beauty shops, etc.

[snafu]

more financial mistakes...failure to understand fees/late charges/overlimits that might be added on to purchases [they are negotiable]. Be aware of interest rates and what they add to the purchase price if not paid off within interest free period.

We need to talk to our children about money management and let them have some level of responsibility in purchases for/by them.

When I tried to talk to DH about 'budget' his eyes would glaze over and information just passed by. By changing terminology to 'cash flow' I sounded more business-like and he was familiar with that professionally.

There are so many more scams these days and they are so well disguised. People who consider themselves to be sophisticated have been trapped in Ponzi schemes for example. If it seems too good to be true, it likely is!

[boosami]

failure to understand fees/late charges/overlimits that might be added on to purchases

This is a great one... So many people sign up for credit they don't understand, and end up getting screwed. Reverse amortization mortgages anyone? Failure to examine or understand the terms of financial agreements should definitely be on this list.

[disneysteve]

This is a great one... So many people sign up for credit they don't understand, and end up getting screwed. Reverse amortization mortgages anyone? Failure to examine or understand the terms of financial agreements should definitely be on this list.

Also, looking only at absolute cost and not percentages. Sure, that payday loan might only cost you $10, but that works out to 250% interest. If the sign said, "Payday loans, only 250% annual interest," maybe fewer people would sign up.

[yorkinvestmentreport]

investing in something that sounds too good to be true (ie. Madoff)

[simpletron]

investing in something that sounds too good to be true (ie. Madoff)

I think a better one would be don't invest in things you don't understand. if you can't understand the investment, how will you know when to sell it or what the risk are?

nobody knew what madoff was doing other than they got thier returns. so nobody understood what they were investing in. the same is true for most scams, they break down after you ask a lot of detailed questions to understand how they will make you money.

[LivingAlmostLarge]

How about my parents. Thinking that the "advisor" are merrill lynch knows everything. So they keep on paying to get "Advice" to lose 40% of their portfolio.

[whitestripe]

Not sure what you mean here, If you are talking about investments. I have to disagree. Investments that are 100% guaranteed are almost certainly not going to outpace inflation. So in effect. by trying not to lose money you end up losing value of your money.

well, my issue with 'taking risks' is yes, a lot of people do make money from them - but a lot of people lose out big time. when you take a risk and you're not sure of the outcome, you're gambling. or is gambling a good financial choice?

maybe i should re-write the suggestion to include
TAKING RISKS WHEN YOU CAN'T AFFORD IT. Sure, if you 'invest' $40k and it's fun money for you, it's not going to make a difference. A financial mistake for someone, is when they invest 40k and then lose out, and lose more than just the money.