Manage Money

2 Things That Harm Your Personal Finance

Let’s face it: not everyone wins a lottery.

Some do, and that makes everyone one home to get a huge windfall once a day. Did you know people spend thousands and even millions behind lottery tickets per year? It’s true!

The strategies given below are not as bad as the lottery, but everyone cannot benefit from these either. There are so many people who still use these strategies without knowing how to really benefit from them, or how to use these optimally to get financial success. These may look like smart money, but there are dangers under the surface many don’t know of.

Using a retirement fund loan

These can be cheaper than other types of loans, and if you borrow, you pay yourself the interest instead of to the lender.

The problem is that the loan can easily turn into a withdrawal. Studies have found that 90% of salaried people with these loans default when they leave their job. Most of these plans require quick repayment after getting fired and quitting the job. If you don’t you are considered to be a defaulter. The money you owe now becomes a withdrawal, which brings in taxes, penalties, as well as thousands in compounded gains.

What you can do is to think whether you need this fun at all. Often, the answer is no. 

Investing in variable annuity

It offers a tax-deferred way to save for your retirement funds without any limit to your contribution. This can result in a steady stream of payments later on.

The problem is they don’t give tax breaks. Your contributions cannot be deducted, and the withdrawals are taxed. Besides, these are considerably more expensive than mutual funds.

Variable annuities are contracts with insurance companies. Your money gets invested in mutual funds, which means your money can lose or gain value according to the market situation. That is why it is called variable annuity. Once your payments start, the company checks for the rest of your life, the life of your spouse after your demise, or others you designate. In case of your death, your heir gets the death benefit. There are some annuities that come with life benefits, and these guarantee a level of income.

However, all these benefits come at a cost. The average annual expense ratio is big. In some cases it is 3%, while in mutual funds it is 0.63%. If costs are high, the amount you can save gets reduced. 

As you can see, here are some things you may not want to do.

 

Rate this article: