Once upon a time, no self-serving radical activist would be caught dead without The Anarchist Cookbook and its misguided recipes for making homemade bombs, tear gas, and other sinister items out of everyday household products.
Of course, that got me thinking. If I were to write my own version of The Anarchist Cookbook that focused on dubious ideas designed to — if you’ll pardon the expression — blow-up my personal finances, what recipes for disaster would I include?
Well … here are a few financial Molotov cocktails for your consideration:
1. Co-signing a loan. Talk about a bad idea. When lenders ask for a co-signer, they are essentially saying they don’t believe the borrower will ever repay the loan. If you agree to co-sign a loan, you will be fully liable for the full amount of the loan should the borrower flake out — and the odds are, he will. Before you sign on the dotted line, ask yourself this: Is it really worth putting your financial future in the hands of someone who is a poor credit risk?
2. Delaying retirement savings contributions. Compound growth is an ally of the young. Here’s why: If you start saving $200 a month at age 24 and earn 5% annually — (I know, but just play along) — you’ll have $323,000 when you’re 65. However, if you delay your contributions until you reach age 50, then you’ll have to save $1210 every month for 15 years with the same returns to end up in the same position. Good luck with that.
3. Borrowing from your 401(k) retirement plan. Yes, you pay yourself back with interest. And, yes, the loan itself isn’t taxed. However, assuming you actually use the loan to pay for something else, you’ll repay the loan with money that is taxed. Then, when you finally make a 401(k) withdrawal in retirement, you will again have to pay taxes again. So, in essence, your loan eventually ends up being double taxed. Not very smart.
4. Using credit card cash advance checks found in your mailbox. Oh sure, it may seem like a great idea at the time, but savvy consumers know that those checks usually come with the same fees and exorbitant annual triple-digit interest rates you get with payday loans. Not only that, but unlike the float typically offered on credit card purchases, there is no grace period for cash advances. So interest begins accruing from the day that cash advance is taken.
5. Overpaying for a college education. Nothing says “financial albatross” like having a massive college loan — with no prospect of ever finding a well-paying job. In fact, for most people, college is a really poor investment today. And if you insist on going to a university, please select a science, technical, engineering or math degree that are always in demand by employers.
6. Paying for your kids’ education with your retirement funds. Speaking of college, saving for retirement is arguably the most critical financial task we have as adults, so why do so many parents risk sacrificing the quality of their golden years by paying for their kids’ college education? Instead, parents should use that money to ensure their financial security in retirement. Remember, our kids will have four full decades to pay off those low interest loans after graduating; the same can’t be said for us parents.
7. Investing in a stock or financial product without doing your own research. There is an old saying that says the less you understand about a stock or financial instrument like a variable annuity or equity indexed annuity, the more it’s going to cost you. It’s true. Relying solely on a broker who gets paid a commission when you buy is asking for big trouble.
8. Marrying before determining financial compatibility. Sure, you can stick your head in the sand and naively assume marriage is a sacrosanct declaration of love and fidelity. However, marriage has real and serious financial impacts that could cost hundreds of thousands of dollars down the road for incompatible couples who end up filing for divorce. The truth is, financial compatibility is as important as emotional and physical compatibility. In fact, it is one of the greatest predictors of whether your relationship will survive long term.
9. Using your credit card when you don’t have enough money to pay it off. When used responsibly, credit cards are a consumer’s best friend. However, they should only be used if the balance can be fully paid off before the interest-free grace period expires. Otherwise, you’ll not only subject yourself to interest charges approaching 30% that make it exceedingly difficult to pay off your debt, but you also risk wreaking havoc on your credit rating if you start missing payments.
There. Next time you’re looking to throw a few wrenches into your personal finances, feel free to use the recipes from this cookbook. I promise you’ll discover why anarchy, by definition, doesn’t rule.
Photo Credit: Jonas B
All points are well-taken. However, I am not too sure of point #8. I don’t believe in marrying just because two people are financially compatible. There is more to it than that.
Many folks don’t follow these 9 points and they have not as we have noticed it time and again. Can you believe in my neighborhood, one guy has gone in life doing just the opposite? He says “Sometimes a man’s gotta do what a man’s gotta do.” In many cases, ego (in the form of ignorance) takes over.
I would have to disagree with point 4. I always carry one, I started doing this for no particular reason about 15 years ago. 10 years ago I used the only one I have used and it was well worth the fee. I was in upstate Maine had car problems, the only garage in town did not take credit cards, the bank was not on my network and I did not have the money to fix the car. I did have that ratty check I had been carrying. As the years go by a scenario like this gets more and more improbable, but you never know.
Great post! if the list were longer I would dare to suggest a few more:
a) Casino (or other) gambling as a hobby/pastime
b) Borrowing to fund the annual vacation
Also:
c) Payday loans!
d) Pawnshop loans
e) Lending to untrustworthy friends or relatives
f) Buying furniture because your house seems too empty
g) Buying an unreliable car because it’s so cool
h) Succumbing to bad peer pressure
I find it hard to disagree with any of those. I look at #8, and my first thought was to say “well, not always”. But then, reality took over and my seasoned, 40-year old viewpoint of things tells me that you’re right on this one. As you are on all.
Yes, those are Molotov cocktails for sure. Good post!
Great post!
A few thoughts: I think some people use the cash advance checks to undertake credit card arbitrage, where they make money on it (but I think you need to really look into this option before doing so, as well as be extremely disciplined). Also, I think it is extremely important for couples to be upfront with their finances. Put everything out there!
I’ve never read The Anarchist’s Cookbook, but I did listen to a lot of Black Flag and Dead Kennedys when I was young. It’s probably a good thing I didn’t know how to blow anything up.
I believe the average default rate on a co-signed loan is somewhere around 85%. Those are some pretty bad odds.
Len,
I really enjoy your site! I’m curious if you’re pulling down some serious coin from the blog?
Jeff
Great rules. People may say #8 doesn’t matter, but maybe they haven’t dated a bottomless pit spender. I’ve been with both types. Savers rule, spenders drool.
Great list! Though, I don’t necessarily think #8 is a hard and fast rule. If the financially responsible person is in control of the finances and the irresponsible person allows them to make the majority of the decisions, it will work I know this first hand. 😀 Heck, my other half has finally started thinking more like a “saver” than a “spender”.
I can not tell you how many times I’ve heard about a friend of mine who has co-signed on their girlfriend/boyfriend’s loans. I always say it’s a bad idea. If you’ve been dating for a couple of months do you think the relationship will last the length of the loan? Definitely something to consider.
Seriously, I think this is the best post Len’s ever done.
Especially the one about strategic post-secondary education. The worst accredited engineering school in the country is a far better place for your kid’s tuition to go than any Ivy League women’s studies department.
You are incredibly clever. I love how you related financial misdeeds to the anarchist cook book. I AGREE WITH EVERYTHING. I think the spouse one is really really key- our money values are practically identical and I can’t ever remember fighting about money. And when he doesn’t agree with me, I work hard to show him the right way! 😀
Anarchy gets such a bad rap…
Great list, and good links.
Disagree on #3. *Any* loan (401K or conventional) gets repaid with money that is taxed. And the 401K funds are going to get taxed upon withdrawal regardless.
It depends what the 401K loan money buys.
If it’s *spent* for a trip to Vegas, then tough nuts. If it’s exchanged for a productive asset, like a CNC plasma cutter, different story. And any loan for a plasma cutter, whether it’s from a local credit union or a 401K, is repaid with after-tax money.
PS – Violent agreement we can do.
I believe this is my first comment on your blog, so allow me to say two things:
1. I couldn’t have said this better myself, and
2. I like your style Len Penzo.
A gerat post as usual Len.
#8 is a lesson that I learned all too well. With that financial lamprey gone, I can now swim much faster towards that One Particular Harbor of retirement.
(How’s that for dating oneself?)
I think these are all recipes for disaster, well at least recipes to make a loud bang in your finances. I think the first three are the ones most people do and it comes back to bite them in the behind.
I like the list Len. I think #8 is, if it had feelings, is feeling badly based upon some of the comments so I am here to give #8 some emotional support. #8, is definitely a good one deserving to be very high on the list in my opinion.
Thank you, Kev! I think #8 will get over it.