Three Money Traps to Avoid

June 30, 2009

When money is tight, it’s tempting to turn to quick fixes but some of them can have lasting consequences for your money and your future. Obviously times are tough and many people are faced with decisions they thought they’d never have to make but here are three money traps to watch out for.

Cashing in your 401(k)

You may be tempted to claim the money in your retirement plan to pay off debts or fund a major expense. If you do, you will not only affect your future, but you may lose a big chunk of money in taxes and fees. When you cash in your 401(k) early, a substantial portion of the funds are diverted to pay for income taxes as well as penalties for early withdrawal.

Consolidating Credit Card Debt into a Home Equity Loan

Combining your high-interest loans into a single low-interest home equity loan may seem like a wise move. But unless you also cancel your credit cards and stop overspending, this consolidation of debt may simply allow you to build even more debt. And if you fall behind in the payments on a home equity loan, you will lose your home.

A better approach is to cut back on your spending and use the money you save to pay off credit card debts. If you are having trouble meeting the payments on loans, call your creditors and explain how your financial situation has changed. Set up a payment plan that you can live with.

Payday Loans

Although payday loans may be easy to come by they usually also carry outrageously high interest rates. They will only put you deeper into debt so avoid them like the plague.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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One Response to Three Money Traps to Avoid

  • Kevin @ Savvy on Credit

    There is a hidden and insidious cost attached to home equity loans – the interest amortization schedule.

    Long term installment loans accelerate interest payments towards the beginning of the loan term. The actual interest paid on these loans is often far higher – because people rarely pay through the entire loan term. They sell the house, or refinance and start the whole snowball over again.

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