5 Financial Decisions That Sound Smart but Are Really Dumb

Vector illustration ? Empty head and money brain.
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By Geoff Williams

Norma Yaeger, 83, of Encino, Calif., thought she was making a smart financial decision last fall, when, after pulling into a Ralph's supermarket, she impulsively hired two men to fix her car.

"Two nice gentlemen came over to me and look at my fender, which was badly scratched. They said that they had a compound that will remove the scratches and restore the paint," Yaeger says.
They would fix it, for just $50.

Yaeger isn't a rube -- she was, in fact, the first female stockbroker to work at the New York Stock Exchange (and recently wrote an autobiography, "Breaking Down the Walls"). She also served as president of two stock brokerage firms. The men who approached her seemed honest, and Yaeger was self-conscious about her fender. She paid the $50, a snap decision that seemed perfectly reasonable.

Instead -- and you knew this was coming -- when she returned from grocery shopping, her car fender hadn't improved. In fact, it looked far worse. Yaeger drove to a mechanic and was told that it would take several days and $1,000 to fix her car."The worst part was that I had to tell my husband about this embarrassing story," Yaeger says.

[See: 12 Money Mistakes Almost Everyone Makes.]

Most people have made a financial mistake that seemed sensible at the time, but in hindsight turned out to be pretty stupid. With that in mind, here are some thoughts from a slew of personal finance experts on five financial decisions that sound smart but are likely a waste of money.

The Mistake: Buying something because it is interest-free for awhile.

Why It Can Seem Smart. It's tempting to buy something with a zero-interest window, such as a "90-day, same-as-cash" offer, in which you're charged no interest if you pay for the product within 90 days.

Why It May Be Stupid. Many people don't end up saving the money or putting it aside when they get it, "and they end up paying accumulated interest at a high rate plus compounding interest on the balance going forward," says Kelley Long, a Chicago-based certified public accountant.

She says consumers make such mistakes when they open a store credit card to get a 15 percent discount, for example, but then carry a 22 percent balance. Paying for things with a rewards credit card to earn frequent flier miles can also be a mistake if you're not paying off the card in full each month. "The interest expenses end up far outweighing the price of an airline ticket," Long says.

The Mistake: Buying long-term care insurance when you're broke.

Why It Can Seem Smart. Who wouldn't want long-term care insurance? It helps pay for basic activities that people need to do on a daily basis, like getting dressed, bathing and preparing food.

Why It May Be Stupid. Senior citizens who are worried about their long-term prospects but don't have money to spare buy it but shouldn't, says Sonja Kobrin, a geriatric care manager in Palm Beach, Fla., and owner of V.I.P. Care Management. Kobrin says many seniors buy it when "their economic status is so low that they would qualify for Medicaid programs, which would pay for care and facility costs at no charge to them."

The mistake: Buying life insurance for a child.

Why It Can Seem Smart. If you bought it, you were probably convinced by an aggressive insurance salesperson that you need insurance for burial purposes, in case the worst happens. Or you may have bought it just to be on the safe side -- no matter what, your child will have life insurance.

Why It May Be Stupid. Your reasoning may be correct, but generally, parents take out life insurance because their child depends on them for financial support. "Unless your kid is Justin Bieber, it is probably unlikely that you need to consider taking out a life insurance policy for him," says Marvin Feldman, CEO of the LIFE Foundation, a nonprofit that educates the public about life insurance. Feldman adds that if there is a history of significant health problems in your family, you may want to consider life insurance so your child doesn't have trouble getting it as an adult. But all in all, you're probably better off putting that money into your child's college account.

[Read: 6 Money-Saving Strategies That May Cost You in the Long Run.]

The mistake: Not having a credit card.

Why It Can Seem Smart. If you've ever had mountains of credit card debt, it seems like the smartest decision in the world. Who wants to be beholden to a credit card company?

Why It May Be Stupid. "Many people believe they are helping themselves by not having a credit card at all when, in fact, you can be hurting your credit score," says Priya Haji, CEO and co-founder of SaveUp, a free rewards program that helps people save and get out of debt.

Haji is correct -- at least to a point. If you cannot trust yourself with a credit card, you're probably better off without one.

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But like it or not, lenders consider whether you have a credit card when deciding whether to offer you credit. If you want a home or a car someday, and you don't have enough money saved to buy either outright, showing that you can peacefully coexist with your credit card may mean you'll get a much better loan than if you don't have a credit card.

If you're really credit-card averse, Haji suggests getting one with no annual fees and making purchases semi-regularly -- then paying them off within the month.

The mistake: Not allotting space in your weekly or monthly budget for fun.

Why It Can Seem Smart. You're budgeting, which is serious work. It seems much wiser to budget for things you know you need, like food and rent, than something you don't, like going to the movies.

[See: 10 Ways to Cut Your Spending This Week.]

Why It Is Stupid. "Just as it's important for people trying to lose weight to allow themselves some 'treats,' it's important for those on a budget to be realistic and include some allocation for fun," says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, a national company that aims to help consumers get out of deep debt. "Depending on income, it might be something as simple as a new bike helmet to enjoy more cycling time, or a small amount for a dinner out each month."

In other words, you're only human. You'll likely do something financially unnecessary or impulsive every month, whether you plan to or not. If you're shrewd, you'll plan for that in your budget, too.

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