Everybody makes mistakes. But while nobody’s perfect, there’s no reason to waste hundreds or even thousands of dollars on financial moves that are proven folly.
Here are eight common financial fouls you can avoid.
1. Borrowing to Buy Depreciating Assets
Problem: Your IOU becomes an OMG when your purchase loses value. That’s why the housing crisis was so devastating to many families. Everybody with an underwater mortgage – meaning they suddenly owed more than their homes were worth – learned this the hard way.
How to avoid it: While homes typically increase in value, we generally know beforehand what’s going to lose value – almost everything. And borrowing money to buy things that decrease in value — like cars, see below — is simply compounding the loss. That’s why — ideally — credit should be used only to buy those few things that generally increase in value: a house, an education, or maybe a business. If you’ve already dug yourself into a hole, check out “How to Pay off $10,000 in Debt Without Breaking a Sweat.”
2. Buying a New Car
Problem: Here’s how Money Talks News founder Stacy Johnson described new-car shoppers in “Why I Don’t Buy New Cars“:
If consumers want to feel smart, they comparison shop, kick a few tires, and talk to a few salespeople in an attempt to get a decent deal. But even if they drive the hardest possible bargain, that new car is still guaranteed to lose thousands of dollars in value before they can get it home.
How to avoid it: For starters, buy used, preferably from private sellers. And there is something of an art to finding a great used car.
3. Saving While in Debt
Problem: Savings provide a sense of security, but if you pay more interest on your debt than you earn on return on your investments, you’re going backward. One possible exception could be debt that comes with a tax benefit, such as mortgage interest or some student loans.
How to avoid it: As a rule of thumb, use low-interest savings to pay off high-interest debt. The reverse will gradually reduce your net worth. But don’t sacrifice peace of mind. If you’re in danger of being laid off or expecting a big expense, and retaining cash helps you sleep at night, that’s worth factoring in.
4. Buying Name Brands
Problem: In some cases, name brands are worth the extra cost. But in others, they contain the same ingredients as generics at a higher price.
How to avoid it: Don’t pay for a popular brand’s advertising budget. When things are worth the extra money, pay it. But for many items, such as prescription drugs, salt and sugar, many cleaning supplies, the generic is identical to the branded product.
5. Ignoring Your Credit
Problem: A good credit score is important because it affects the rates you pay for loans, insurance rates, credit offers and even job offers. Yet many people don’t even bother to check their credit standing.
How to avoid it: Understand the cost of bad credit and take steps to improve yours. Take a few minutes today and get a free copy of your credit report at AnnualCreditReport.com.
6. Not Asking for a Better Deal
Problem: When confronting a major expense, the asking price doesn’t have to be the price you pay. From doctor bills to credit card interest rates, the way to get a better deal is often as easy as asking.
How to avoid it: Always be friendly, but always ask for a better deal. Regardless of the activity, there are almost always ways to get a better deal, whether it be awesome prices on vacation lodging or cheaper haircuts for the family.
7. Paying Someone Else to Do What You Can Do Yourself
Problem: Labor is typically the most expensive part of many home repairs and maintenance. Do you really want to pay the price for gardening, painting, car washing, mowing and cleaning?
How to avoid it: You can save that money by doing many tasks yourself and gain the satisfaction of self-reliance in the process. You may decide some DIY projects — making your own laundry and dish detergent or growing your own vegetables — are satisfying and worth the savings, or not, depending on your other demands and hourly pay. But at least be thoughtful about it. On the flip side, if you’re an avid DIY-er, consider that there are times to back away from DIY projects to save money, avoid catastrophe and injury.
8. Blowing Tax Refunds
Problem: The average American tax refund this year was $3,120, according to the IRS. Many people either blow it all at once or fritter it away.
How to avoid it: First of all, remember that a tax refund is money that you overpaid to Uncle Sam. It was your money when the IRS had it, and it is your money when you have it back in hand. Use it to best serve your overall financial health — pay down high interest debt, fix the roof or whatever — but don’t squander it like lottery winnings.
If you are getting a large refund, visit the IRS website to adjust what you are having withheld throughout the year. Get as close as you can to what you actually owe, because that refund is really not a bonus — just money that you could have used better.
This post originally appeared on Money Talks News.
More from Money Talks News:
- How to Get the Best Deal on a Car Loan
- 9 Top Time-Management Mistakes and 10 Ways to Beat Them
- Duh. 7 Obvious Money-Saving Tips People Often Forget