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.
The Personal Finance Anarchist Cookbook
Of course, that got me thinking. If I were to write my own version of The Anarchist Cookbook that focused on dubious ideas that were usually guaranteed to — if you’ll pardon the expression — blow-up your personal finances, what recipes for disaster would I include in it?
Here are a few financial Molotov cocktails for you:
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 wenches 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
(This is an updated version of an article originally posted on February 14, 2011.)