- 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.