How to avoid 8 foolish and costly financial mistakes
Everybody makes mistakes, but such errors are particularly painful when they cost you some hard-earned cash.
Sign up for the free Money Talks Newsletter
In the past, Money Talks News founder Stacy Johnson has written about his own money mishaps:
Confession time: I've blown it big on more occasions than I care to mention. In fact, most of what I've learned about money I didn't learn in books or by being a CPA, stock broker, or financial reporter. I learned it the hard way — by making stupid decisions and missing opportunities.
As Stacy's own list of 10 mistakes shows, nobody is perfect when it comes to handling finances. But even if errors are inevitable, there is 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 just by exercising a little thought and a lot of prudence.
1. Borrowing to buy depreciating assets
Problem: Your IOU becomes an OMG when a purchase loses value. That's why the housing crisis was so devastating to many families. Everybody suddenly with an underwater mortgage — meaning they owed more than their homes were worth — learned this the hard way.
Sign up for the free Money Talks Newsletter
How to avoid it: Homes typically increase in value, although that's not always true, as the Great Recession reminded us. Meanwhile, just about everything else loses value after you purchase it. Borrowing money to buy things that decrease in value — like cars — simply compounds the loss.
Ideally, credit should be used to buy only those few things that generally increase in value: a house, an education and 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." And if you want to buy those nice things without credit, try "Ways to Make Your Savings Grow Faster Automatically."
2. Buying a new car
Problem: Here's how Stacy 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. To get a good deal, remember that there is something of an art to finding a great used car. Check out "8 Tips for Buying Your Next Car for Less" and "6 Things You Should Check Before Buying a 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 you anticipate a big expense on the horizon, retaining cash helps you sleep at night.
Sign up for the free Money Talks Newsletter
4. Buying name brands
Problem: In some cases, name brands are worth the extra cost. But in other situations, brand names are no better than alternatives that can be purchased at a much lower 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, and many cleaning supplies — the generic is identical to the branded product. For more detail, see "12 Things You Should Always Buy Generic (and 4 You Shouldn't)."
RELATED: 8 tips to teach your kids about saving money:
5. Ignoring your credit
Problem: A good credit score is important because it affects interest rates you pay for loans, insurance rates, credit offers and even job offers. Yet many people don't even bother to keep track of their score.
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. If your credit score is poor, study up on ways to get it in shape with "7 Fast Ways to Raise Your Credit Score."
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 ask for a better deal. For ideas on how to haggle and get better deals across the board, check out "15 Ways to Never Pay Full Price for Anything." Regardless of the activity, there are almost always ways to get a better deal, whether that's awesome prices on vacation lodging or cheaper haircuts for the family.
Sign up for the free Money Talks Newsletter
7. Paying someone else to do what you can do yourself
Problem: Labor is often the most expensive part of home repairs and maintenance. Do you really want to pay the price for gardening, painting, car washing, mowing and cleaning?
How to avoid it: Save that money by doing many tasks yourself. In the process, you'll gain the satisfaction of self-reliance. You may decide some DIY projects — making your own laundry and dish detergent or growing your own vegetables — are satisfying and worth the savings. On the flip side, consider that there are times to back away from DIY projects to save money and avoid catastrophe and injury.
8. Blowing tax refunds
Problem: The average American receives thousands of dollars in tax refunds, according to the IRS. In February, the IRS reported this amount at $3,164. Many people either blow this money all at once or fritter it away.
How to avoid it: Remember that a tax refund is money 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 pay down high interest debt or to fix the roof. Better still, "Use Your Tax Refund to Change Your Life." But whatever you do, don't squander it like lottery winnings
Sign up for the free Money Talks Newsletter
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 — it's just money that you could have used better if it had been in your pocket during the course of the year.
We'd love to hear about your financial fouls, too. Share them in the comments or on our Facebook page.
More from MoneyTalksNews:
7 Ways to Make Your Savings Grow Faster Automatically
Beware These 10 Retail Sales Tricks That Get You to Spend More
The 7 Simplest Ways to Sidestep a Debt Trap
