The first question you need to ask is “What you can I do to avoid getting into debt in the first place?”  Experts say there are certain money mistakes that many of us are likely to make.  Below are the major money mistakes that can easily land you in debt.  These are very common mistakes that many of us fall into without even knowing it.  Really they aren’t mistakes so much as missteps.

5 Bucks a Day Jr.

Buying a new car

This is not so much a money mistake, unless you really can’t afford a new car, as it is a preference that can easily get you into debt.  No matter how exciting a new car seems, it is a known fact that new cars depreciate several thousand dollars within the first year alone. Save yourself all that money that you’re paying for the privilege of the new car smell and buy a high quality pre-owned vehicle.  It makes much more financial sense.  Many used cars still carry the original warranty.

Borrowing from your 401(k) or 403(b)

In most cases, you won’t get a great deal at all. Your 401(k) investments are pre-tax, which means that eventually the money that you put in will get taxed when you withdraw it.  Taking out a loan from your 401(k) or 403(b) means that you will be borrowing from pre-tax dollar which will eventually have to be repaid.  When you eventually retire and begin your withdrawals, you will be taxed again.  If you borrow money from your 401(k) or 403(b), you will effectively be getting taxed twice.  Did you know that you are also required to repay the loan in only a few months?  If you don’t happen to have the money for repayment, your loan will be treated as a withdrawal. You can expect a whopping 10 percent early withdrawal penalty.  Just don’t do it if at all possible.

Using your home equity line of credit to pay off your credit card debt

You can lose your home if this doesn’t work out.  Credit card debt is often described by unsecured debt, because there’s no real collateral that the credit card company can force you to sell in order to collect on the debt.  A home mortgage and home equity loan is known as secured debt because your home is the collateral. But if you fall behind your payments, the lender can easily require you to sell your home in order to collect on the debt.

Do not finance your new home purchase with a variable interest loan

Avoid those low initial teaser rates for financing your new home. If you can’t afford the home otherwise, you should probably not buy the home. Avoid option adjustable rate mortgages too.  This will usually cause your loan balance to become bigger each month as the lender adds the unpaid interest on the balance of your home loan. Watch out for those great introductory rates, they can often turn out to be a burden you will eventually endure.  This is what happens many times to those who have foreclosed on their homes.

Avoid buying a variable annuity

When you buy a variable annuity you are making a contract with the insurance company and the money is used to buy mutual funds.  Salesmen may try to pitch this kind of investment as a way of buying and selling funds inside an annuity without the tax bills (as long as the money is invested.)  But did you know that you will have to pay income tax on any withdrawals?  Plus, if you withdraw any money from your variable annuities before you are around 60 years of age, you will also be penalized with a 10 percent fee.  There are often many buried fees that are attached to variable annuities. Make sure to read all the fine print.

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This entry was posted on Friday, January 2nd, 2009 at 10:58 pm and is filed under Debt Free Living. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.