Could You Be Making These Finance Mistakes?
The Good News: You're in a pinch, but your company allows you to borrow from your 401(k).
The Hidden Risk: Make that plural—there are three problems with taking your company up on that loan. First, if you leave your job, voluntarily or not, you'll typically have only a few months to pay back what you've borrowed. If you can't, the loan converts to a withdrawal on which you'll owe income tax, and if you're under 55 you'll also be hit with a 10 percent early withdrawal penalty. Second, when you pull money out of any investment, it's no longer working for your future. Anyone who took a loan from their 401(k) in early 2009 missed out when the S&P 500 stock index shot up more than 60 percent from March to December. That was a costly time to be out of the market. Third, your loan money will end up being taxed twice—when you repay the loan it will be with after-tax dollars, and then in retirement, when you begin using your 401(k) for living expenses, you'll be responsible for the tax due on those withdrawals.
How To Stay on Top: Make a 401(k) loan an absolute last resort. A well-maintained emergency savings fund is a far better insurance policy against unforeseen expenses. As you know, I advise saving up eight months of living expenses—especially now, when most unemployed people need at least six months to find a new job.
Kids Need The Darndest Things
The Good News: You're expecting, or you have young kids.
The Hidden Risk: You may not be providing enough security for your family if something happens to you.
How To Stay On Top: You can't control fate, but you absolutely, positively can make sure that your children will be financially secure, no matter what. A term life insurance policy that's at least 15 times your annual income will give your kids' guardian plenty of money to raise them according to your wishes. I know that sounds like a lot, but these policies are remarkably inexpensive.
The Good News: The steep decline in home prices means you can afford to buy your first home.
The Hidden Risk: It's easy to underestimate the real cost of home ownership.
How To Stay On Top: Property tax, insurance, and maintenance can add 30 percent to your base mortgage. To see how that extra expense will affect you, plug in your price range for a home at BankRate.com/Calculators/Mortgages/Mortgage-Calculator.aspx to determine your monthly mortgage payment, and then add 30 percent to that figure. If the total is more than your current rent, spend six months "playing house"—each month, deposit the difference between your rent and your probable mortgage payment into a separate savings account. If you can't afford this exercise, you can't afford to buy a home at that price just yet. And don't forget: Before buying a home, you must have an emergency fund that can cover your expenses for eight months. If anything happens to your job or a big expense pops up, you'll need to have the cash to pay the mortgage. Finally, don't buy if there's any chance you'll move within five to seven years. If you sell a newly purchased house, you risk making too little on the sale to cover the typical 6 percent agent's fee and your moving costs. I know the housing market's rock-bottom prices are tempting, but it's better to be safe than sorry.
Use this financial to-do list to save money