Trick or Treat, the Personal Finance Edition: Sweet Deals and Scary Mistakes
Treat: If a reasonably sized student loan makes going to college possible, it's surely a good thing. Better still, if you can get a loan backed by the government with a low interest rate and the luxury of not having to pay it back until you get your first post-grad job.
Trick: As with candy, there can definitely be too much of a good thing when it comes to these loans. "If you take out more than you can handle, or take out more than you need, it can be a trap," says Derrick Kinney, a financial adviser with Derrick Kinney & Associates. If you need to go deep into the red to attend a certain college or university, it may be the wrong one for you. Pick a university that won't drown you in debt. It can also help to figure out the real cost of going to a given college in advance. Also, be wary of high-interest rate loans.
Treat: If you charge only what you can pay off each month, the convenience of a credit card can be sweet. Up the treat factor too, with cards that offer rewards and cash back programs.
Trick: If you carry a balance that just grows and grows, you're putting yourself in a scary position. "The amount of interest you pay will almost always be greater than the value of your rewards," says Kinney. And large outstanding balances and late payments can damage your credit score.
Treat: If you get quality merchandise at genuine bargain prices, you're in the right spirit.
Treat: If you need cash quickly and have no other options, borrowing from your 401(k) can be a hassle-free way to get it. You're borrowing from yourself, so there's not even a credit check
Trick: These deals can go sour fast if you don't have a clear plan to pay yourself back. Moreover, even when you have a plan, the unexpected can happen, especially in this unpredictable economy. "If you're laid off or leave the company [that sponsors the 401(k) plan], the loan is due immediately, or is considered a distribution which results in taxable income and possibly penalties," says Michele Day, a certified public accountant and personal finance coach.
Treat: Invest pretax cash now, make a profit, and pay the IRS their share later, when you're hopefully in a lower tax bracket.
Trick: You might not end up in a lower tax bracket later, especially if rates rise across the board. "Americans love to defer their taxes. But, if you're successful in growing your nest-egg and tax rates go up long term -- as seems likely -- you're only going to pay higher taxes on a bigger number," predicts Yellen.
3 Deals that Look Like Treats, but Are Usually Tricks
• Investment Tips
You know somebody who knows somebody who really knows what they're talking about when it comes to investing. They offer to share "inside" info with you that promises big returns.
But why would they do such a thing? "More likely, it's a trick. Do your homework and don't rush into investments," says Mackey McNeill, CPA and personal financial specialist with Mackey Advisors.
• Zero-Interest Deals
Whether it is furniture, a mattress or whatever, any time something is being hawked at zero down, no payment and no interest for one or two years, the terms get your attention. And "free for now" can be easy on your budget, especially if it's for a necessity.
"There is no such thing as a free lunch," says Pamela Yellen, author of Bank on Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future. The cost of the lowered interest is almost always factored into the purchase price. Always try first to negotiate the lowest price break you can get in lieu of a low or zero interest rate,"
• Balance Transfer Deals
Those offers can seem like a godsend -- a zero or 1% or 2% interest rate on credit card balance transfers for a specified period of time. Says Day, "That 4%-5% upfront transaction fee can take all the fun out of it."