Saving for the future is a little bit like the game Chutes and Ladders. You inch ahead steadily and then – Oh, no! – One misstep and you drop back three levels.
The money game is full of potential chutes, some of which, like a recession or lay-off, are unavoidable. Others are easy to side step. Here are three waaaay too common money mishaps that you should avoid at all costs.
1. Borrowing from your 401(k). So tempting, right? You need/want a new house or new car, or need to pay-off a crushing medical bill. And there sits $32,538 in your 401(k). You’ll just grab $15K, take care of business, and pay it back in the required five years. Cool? Not at all.
The cost of borrowing from your retirement account far exceeds the sum you lend yourself. You are also losing the compound interest that $15,000 would earn over five years. Worse, many plans bar additional contributions to the fund until you have paid back the loan, so you are losing months or years of added retirement savings. Even if you are allowed to contribute, you probably won’t have the cash to do so because…. Right. You’re paying back that loan.
Borrowing from your 401(k) also limits your career options as the loan must be paid off immediately if you leave your current employer. If you fail to pay back the loan for any reason, it will be treated as a withdrawal and you’ll get socked with a hefty tax bill.
2. Timing the market. This refers to jumping in and out of the stock market in an effort to catch upswings and avoid downturns. Craziness. Attempting to buy low and sell high rarely works as a strategy for investors – amateur or professional. There are just too many variables and too many things that can go wrong.
On a similar note, jumping out of the market on potential bad news (9/11 or Brexit) is almost always a mistake. It leaves your money on the sidelines when your investments will very likely be recovering from any slump and eventually moving even higher.
As good poker players know, scared money don’t make money.
3. Buying insurance as an investment. Investing is for growing a nest egg. Insurance is for protecting what’s important in your life. Keep ‘em separated.
Your insurance agent may try to sell you cash-value or “whole life” insurance with the pitch that such policies offer both protection and a tax-deferred investment vehicle. Yes, they do. But the monthly insurance premiums will be much higher than on a term insurance policy and there are often lots of fees and penalties buried in the fine print. Oh, and there’s typically an annual investment fee that can easily eat up another 3% of your money.
You are almost certainly better off buying term coverage to protect your family’s future and investing in a 401(k) or IRA to save for that future.
Avoid these financial stumbles and you’ll make much faster progress up the money ladder towards the finish line of a fully funded retirement.