Don’t let cost-cutting techniques derail your finances.
No one wants to spend more money than needed, but some attempts to save a buck could hurt your finances. Seemingly frugal choices can have unexpectedly expensive outcomes, such as a leased vehicle that results in significant mileage charges or inexpensive clothes that fall apart. Other efforts, like setting money aside but neglecting to pad your retirement savings, may catch up with you decades later when your golden years end up being vastly different than envisioned. With that in mind, discover common money moves and tactics to trim costs that can backfire.
You shop based on price alone.
A brand name is no guarantee of quality, but always buying the cheapest item could end up costing you more money in the long run. A smarter shopping strategy is to look for value, says Elijah Kovar, co-founder and partner of wealth management firm Great Waters Financial in Minneapolis. You could spend $100 on men’s dress shoes that will need to be replaced each year or splurge on a pricier pair that could last as long as a decade with proper care, Kovar says. Over time, buying one higher quality item may cost less than buying cheaper goods that have to be replaced frequently. “We want to pay for quality,” he adds.
You finance purchases because of a 0% offer.
Taking advantage of 0% financing seems like a great way to keep money invested while paying off a larger purchase. However, the strategy only works if you pay off the balance before the zero APR expires, says Chad Parks, CEO of Ubiquity Retirement + Savings, a provider of 401(k) retirement accounts. Otherwise, you could get hit with a high interest rate that may be assessed back to the date of purchase. Promotional financing may lead people to buy items they could otherwise not afford. “They don’t have it paid off in time and then they end (up) in some really terrible financing,” says Kristian Finfrock, a financial planner and founder of wealth management firm Retirement Income Strategies in Madison, Wisconsin.
You transfer credit card balances for a lower APR.
It seems like there could be no downside to transferring balances from high APR credit cards to those with a lower APR, but it’s a move that could backfire. “First and foremost, a lot of time there is a fee to transfer that balance,” Finfrock says. Plus, you may not make a monthly payment during the same month of the transfer, meaning your balance continues to grow thanks to the balance transfer fee and any interest charges that may have accrued. Then, once the introductory APR offer expires, you could find yourself paying a higher interest rate than what was assessed on your previous card.
You use a rewards credit card.
Rewards credit cards offer cash back, travel points or other perks in exchange for your charging purchases. Parks suggests asking yourself: “How can they afford to do that?” Many rewards cards have a higher interest rate than non-rewards credit cards. That means carrying a balance could effectively wipe out the value of your points or cash back. A bigger issue, according to Parks, is that these and other cards charge merchants 2% to 3% or more in processing fees and that cost often gets passed on to consumers in the form of higher prices. U.S. businesses that process between $10,000 and $250,000 in annual payments pay an average of between 2.87% to 4.35% per transaction, according to the payment processor Square.
You lease a car.
Leasing a car is often less expensive than buying. However, there are more expenses to a lease than the monthly payment. There are usually upfront costs that include the first payment, a deposit, fees, taxes and registration. But it’s the backside fees of the lease that really cost people, Finfrock says. Consumers fail to read the fine print and don’t realize they could be charged 15 cents per mile or more for every mile they drive over the allowed limit. There can also be fees for excessive wear and tear with some companies using vague language to define that as anything that impairs the vehicle’s appearance.
You refinanced student loans.
Graduates should be careful about refinancing their student loans, Parks says. While there are cases in which it makes sense, teaser rates and introductory offers may hide less favorable terms. Parks had his own experience of refinancing a loan that resulted in negative amortization, meaning his balance kept growing even though he was making payments. People should also think twice about refinancing federal loans and turning them into private loans. Federal loans may have lower interest rates and longer repayment periods than what’s available in the private market. Beyond that, only federal loans are eligible for government loan forgiveness programs for certain teachers, government and nonprofit workers.
You hold investments to avoid taxes.
Some people are so tax-averse they make poor investment decisions as a result. “They want to avoid paying taxes so they hold onto one stock to avoid capital gains,” Kovar says. That one stock may represent a disproportionate amount of their investments and could spell financial disaster should the value of the company decline. Even if it means paying capital gains tax, it might be better to sell some of the stock in order to create a diversified portfolio that will be less susceptible to market downturns.
You skipped saving for retirement.
When money is tight, it can be tempting to put retirement savings on hold. Unfortunately, compound interest, which helps retirement funds grow significantly, works best over long periods of time. By skipping retirement savings, you may also be forfeiting matching funds from your employer. You’ll have more money in your pocket now if you don’t save for retirement, but it could result in a meager lifestyle later. Social Security retirement benefits only replace about 40% of your income. And, as Finfrock puts it, “There is no such thing as a retirement income loan.”
You took a loan from a 401(k) plan.
Your 401(k) may seem like a good source of cash should you find yourself in need of a loan. Plans may allow loans of up to half the vested 401(k) balance or $50,000, whichever is less. Most loans need to be repaid within five years, and all interest on the loan goes back into the 401(k) account so you’re essentially paying yourself. “That sounds, on the surface, like a good deal,” Parks says. However, if you leave your job for any reason, the loan must be paid off before you file your next federal income tax return. Otherwise, you’ll owe taxes on the balance plus a 10% penalty if you’re younger than age 59 ½.
You wrote a will instead of creating a trust.
A will is cheaper than a trust, but it could end up costing your heirs more money. “The will is simply probate instructions,” Finfrock says. Your loved ones still need to go through the court system to distribute any financial accounts without a named beneficiary. While perhaps not necessary for very small estates, “The trust, if designed correctly, can help you avoid probate completely,” Finfrock says.
You haven’t hired a financial planner.
There are plenty of resources from online brokerages to personal finance books that make it possible for people to invest and manage their own money. But they may be making mistakes by not hiring someone to help them, Kovar says. Financial planners not only have a greater depth of knowledge, they also are less likely to make rash decisions. “When the market is down, I’m not going to get emotional,” Kovar says. That means that rather than selling low and locking in losses, a trusted finance professional can help you stay the course and ride out difficult economic periods.
Original article written by Maryalene LaPonsie at U.S. News