It can be so frustrating watching other people make mistakes when you know better. In this post I go through several mistakes that I have personally witnessed in hopes that it will help you avoid them and their ugly consequences.
Ok, don’t get offended, but I am human. Sometimes I really do want to slap people. I don’t actually do it, though. Don’t judge me. I’m just being honest here.
I thought today I would share with you some of the most frustrating money mistakes I’ve seen people make. This isn’t to give anyone a hard time or make them feel bad. This is so that you can learn from them. Pay attention so you won’t make the same mistakes yourself. Ready?
Withdrawing Money Early From A 401(k) When You Have A Roth IRA
Withdrawing money early from your retirement accounts is cheating your own future. You’re not just taking away the money that you withdraw, you’re taking away all of the interest that it would have earned. For example, if you withdraw $1,000 when you are 30 years away from retirement, it will cost you $10,000 to $30,000 in lost interest. That’s a lot.
Draining your retirement accounts is enough to make me want to slap you, but taking money from a 401(k) when you have a Roth IRA is even worse. Why? You are allowed to withdraw contributions (not growth) from a Roth IRA at any time penalty-free. Early withdrawals from a 401(k) are subject to a 10% penalty. So why would you pay 10% to take money out of a 401(k) when you can get it for free from a Roth IRA? Ignorance. And now you are no longer ignorant, so I’d better not catch you doing this.
Not Paying Taxes
The IRS is not your grandma or your third-grade teacher. They aren’t going to forgive you and give you a free pass just for coming up with a great sob story. As a US citizen or resident, you are legally required to contribute financially to society. It’s not just the government you’re cheating, it’s all of us you’re cheating.
Aside from the moral implications, not paying your taxes is a really bad financial move. The IRS will come after you. And they have a lot of power. And they charge interest.
Any other creditor would be required to sue you in order to garnish your wages or remove money from your bank account. The IRS doesn’t have to. They can just take it. So, you really want to stay on their good side if it’s at all possible.
Also, most creditors will settle debts for just a percentage of what you owe once they’ve given up on you ever paying. Not the IRS. Unless they have good reason to believe that you will never again in your lifetime be capable of earning any kind of income, they will not settle. Our government is serious about getting the money that’s owed to them. The money owed to us, I should say.
Buying A House/Renting An Apartment That You Clearly Cannot Afford
I remember someone once telling me, “I bought the more expensive house because I thought it would be good to stretch myself.” Stretching yourself is great in a lot of situations. Trying new foods, hanging out with people you aren’t used to, running that extra mile. But stretching yourself financially just sets you up for disaster.
Don’t make the mistake of thinking that if you can get approved for the loan or rental you can afford it. Right before the housing crash, a friend of mine that was struggling to make his mortgage told me that he had been approved for a loan twice the size of the one he had.
Mortgage brokers don’t know your unique situation. They are just trying to sell a mortgage. You have to take responsibility for your finances and know what you can realistically afford. And don’t let recent regulations lull you into a sense of security that what happened with the housing crisis can’t happen again. Before the last housing boom, the median down payment was just over 7%. At the height of the boom, it had dropped to 3%. Now, almost 10 years later, we don’t seem to be much smarter. The FHA is financing loans with 3.5% down and conventional loans are being offered with as little as 3% down.
You need to have a clear understanding of your own personal financial situation and only buy or rent what you can afford on your own. If you can’t make the payment without roommates, don’t do it. Roommates come and go, but mortgages/rent are forever. Not really forever, but they usually last a lot longer than roommates do.
Lying To Your Spouse About Money
The IRS can be really scary, but I think this is the worst of the mistakes we’re discussing today. Women laugh about “hiding the Target bags under the bed,” but this is really serious. Relationships, especially marriages, are built on trust. Without trust, the relationship will not survive.
The number one cause of stress in marriage is finances and they are commonly cited as one of the major causes of divorce. There is a reason for this. Getting a handle on your finances can be very difficult. Add in different personalities, upbringing, and gender differences, and the challenge only escalates. It’s hard enough to get on the same page with finances in a marriage relationship when you’re being honest with each other. Deception will just make things impossible. Please, if you value your marriage at all, don’t lie to your spouse about money.
There you have it. Now you have no excuse to make any of the above mistakes. Don’t worry, though, there are plenty of other mistakes out there for you to make. And I promise that if you come to me with a problem, I will not slap you. Even if it’s one of the mistakes listed here. I promise. I’m here to help.