10 Infamous 'Last Words' of Personal Finance
Managing your finances can be confusing. You might hear all sorts of advice that seems prudent. And you might assume that you're taking the right approach by acting on this advice.
But what seems like a smart course of action might actually jeopardize your financial security. Here are 10 personal finance statements that financial experts have heard at least once from clients or others that weren't wise moves.
1. 'I want to cash out my IRA and buy a new truck.'
Jeff Rose, a certified financial planner and founder of Alliance Wealth Management, said a client once said he wanted to use the money in his IRA to buy a new fully loaded GMC Denali. It might have seemed like a good idea to Rose's client because he would be using his own money rather than borrowing to make the purchase. But there's a high price to tapping an IRA before retirement.
"When I explained to him the taxes he would be paying by cashing out his retirement account were almost half of what the truck's sticker price was, he back pedaled a bit," Rose said. IRA withdrawals are treated as taxable income and subject to an additional 10 percent early withdrawal penalty if you take money out of your account before age 59½. Plus, cashing out an IRA before retirement might mean you won't have enough money saved to retire.
2. 'I'm going to pull my money out of stocks and wait until the market straightens out to get back in.'
Investors often say this during market downturns because they're afraid their investments will lose value, said Ken Weber, president of Weber Asset Management and author of "Dear Investor, What the Hell Are You Doing?" But their reasoning is flawed.
"When you get out when the market is low, you're locking in your losses and you're locking yourself out of the eventual recovery," Weber said. As long as you have a diversified portfolio of mutual funds, you should stay the course during downturns.
3. 'I'll save for retirement after I pay off student loans, buy a house and send the kids to college.'
If retirement is far off in your future, it might seem smart to prioritize other financial obligations. "Saving for retirement is last on people's list in our immediate gratification society," said Robert Johnson, president and CEO of The American College of Financial Services, which provides education for financial professionals.
However, time is what people need to be able to save adequately for retirement. "Success in investing is not about timing the market, but time in the market," he said. "You simply can't wait until retirement is approaching to start planning for retirement."
4. 'Let's consolidate our credit card debt with a personal loan.'
Using a personal loan that carries a lower interest rate can be a good way to pay off high-interest credit card balances and wipe out your debt quicker. However, if you continue using those cards and charge more than you can afford to pay off, then you are setting yourself up for financial trouble because you'll have a personal loan and credit cards to pay, said Michelle Black, a credit expert with the credit education and restoration company Hope4USA.
"Consolidation must be coupled with a commitment to financial change," she said. "Otherwise, you are only creating a larger problem for yourself to try to deal with down the road."
5. 'Take advantage of buy now, pay later.'
This advice was given to Jason Hull when he was buying his first home. Hull, a certified financial planner and chief technology officer for online financial planning service myFinancialAnswers, was considering a Department of Veterans Affairs mortgage offer to veterans and service members that often doesn't require a down payment.
"While putting no money down meant that we could purchase a house that we otherwise could not have purchased for lack of a down payment, it also encouraged bad financial behavior right as we were starting out: namely, buying now and paying later," Hull said. The better course of action is to rent until you've saved up enough for a 20 percent down payment so you're not saddled with excessive mortgage debt.
6. 'The way this country is going, I don't want to invest.'
Weber said that he's heard this countless times over the years because people are afraid by what they hear or read in the news. Don't let fear guide your investing decisions, he said. Instead, if you need guidance, hire a professional who can help you pick the right mix of investments that will offer growth while meeting your tolerance for risk.
7. 'I have credit card debt but want to open a new card to get 25,000 airline miles.'
As tempting as the offer may be, you shouldn't take advantage of it, says Heather Lovett, director of public relations for DealNews. "If you are carrying credit card debt, your only goal should be paying off that extremely expensive debt," she said.
Most credit cards that offer travel rewards require that you spend a minimum amount to accrue points or free miles. "Those free miles will suddenly be very expensive when the $3,000 minimum spend costs you 22 percent in interest per year," Lovett said. "And if you fall further behind, your credit score will drop, making any future borrowing more expensive."
8. 'I don't need to worry about retirement savings because I expect to get an inheritance.'
It's unwise to assume that just because your parents are retired and seem to be doing well, you will inherit a significant sum, said Michael Fuhr, a certified financial planner with SageVest Wealth Management. Your parents may need a large portion of their assets for health-related expenses, especially if they require nursing home care and don't have long-term care insurance to cover it, he said. If there are multiple siblings, a potential inheritance may be reduced further.
Or your parents might decide to spend their hard-earned money on themselves during retirement. "If you don't know what their plan is, then you can't assume it includes you in a significant way," Fuhr said. It's always best to be disciplined and save for your own retirement.
9. 'Let's use our savings to start a business.'
It's good to have an entrepreneurial spirit. But you should also realize that many businesses fail, said Priyanka Prakash, a lending specialist at FitBizLoans.com. "A lot of people with hopes of owning a business dump their entire life savings into it," he said. If the business goes belly up, they might have to declare bankruptcy.
Prakash said new business owners should have saved enough to cover six to 12 months' worth of expenses to fall back on if the venture doesn't succeed or grow as fast as expected. He also suggested that they limit exposure to their personal assets by finding outside investors for their business.
10. 'That won't happen to me.'
People often assume they don't need to insure themselves against disaster, said Jeff Jones, a certified financial planner with Longview Financial Advisors. He also said that many believe they won't need long-term care.
"We are living longer and a long-term-care need, such as an extended nursing home stay, may be one of the largest single financial risks to a retiree's financial plan," he said.
The average annual cost of care in an assisted-living facility is $43,200 and is $91,250 for a private room in a nursing home, according to Genworth's 2015 Cost of Care Survey. Medicare offers limited coverage. Medicaid programs typically require that all of your assets are spent before coverage becomes available, Fuhr said. However, a long-term-care insurance policy can help offset the tremendous cost of assisted living and nursing home care.
This story, 10 Infamous 'Last Words' of Personal Finance, originally appeared on GOBankingRates.com.