Updated on 02.21.15

Five Money Moves No One Should Ever Make… Ever

Payday loan lender

Payday loans, with their obscene interest rates, can lead to perpetual indebtedness. Photo: Paul Sableman

Donald Trump is famous for much more than his popular television show and confusing hairstyle; he’s also famous for being very, very rich. Of course, he wasn’t always as rich as he is now, and his businesses have even filed for bankruptcy a handful of times.

Still, most people would say he knows a thing or two about both good and bad financial moves. And although he is currently best known for berating people with the famous tagline, “You’re fired,” he is also well known for several quotes about life and money, including this one:

“Sometimes the best investments are the ones you don’t make.”

Isn’t that the truth?

An Overflow of Advice

Your whole life, everyone will tell you about the many financial moves you should be making. You should graduate from college and get a job right away, your mom will say. Or you should start contributing to your 401(k) as soon as you get your first paycheck. You should start paying your student loans while simultaneously saving for your first house and baby — that isn’t even born yet.

Everyone agrees. But does anyone ever tell you about the things you shouldn’t do? The investments you shouldn’t make?

Probably not, but let’s take Trump’s word on this one: When it comes to money, sometimes the best moves are the ones you never make. Here are five financial moves you should avoid at all costs:

1. Living the Good Life on Student Loans

Recent studies have proven that the value of some college degrees is questionable. But do you know what’s worse than shelling out big bucks for a degree you can’t use? Borrowing more money than you need for school and blowing it on non-necessities.

Case in point: A U.S. News & World Report feature from several years ago profiled a number of college students who saw student loans as their opportunity to live the high life. Some used student loans to finance new cars, furniture, and televisions, while others used them to splurge for trips overseas.

The problem? Many of these students didn’t learn their lesson until they were staring down tens of thousands, or even hundreds of thousands of dollars, in student loan debt years later. That’s an expensive way to learn a lesson.

But the problem isn’t limited to spoiled college freshmen who want to have their cake and eat it, too. According to U.S. News & World Report, many of the students who borrow the most are non-traditional students – often older, and with kids or a family. Because these type of students are often low-income, they can qualify for enough student loans to pay not only their tuition, but their housing and living expenses, too.

It isn’t always a problem, and sometimes it all works out. But you don’t always know until it’s too late.

The lesson to remember: Student loans don’t go away in bankruptcy, so whatever you borrow will have to be paid back. Think long and hard before you borrow that money, because eventually, the bill will come due.

2. Taking Out a Payday Loan

Most people have to drive by at least one check-cashing place on their way to work or school. They’re usually in a strip mall, most likely next to a liquor store, and always have flashy signs that promise to “cash your paycheck today” or “hook you up with a payday advance.” Some will even loan you your tax refund money the day you submit your return. Sounds nice, doesn’t it? So, what’s the problem?

According to the Center for Responsible Lending, the problem lies in the crazy fees and interest you’re asked to pay for the privilege of seeing your paycheck a little early. The most recent data show that the typical two-week payday loan charges an interest rate from 391% to 521%. Furthermore, the typical payday loan borrower remains in payday loan debt for at least 212 days of the year.

And that’s the other problem with these loans. The high interest rates make them incredibly hard to pay off, a fact that leads to constant “flipping” of the loans – a kind of perpetual indebtedness. And the more you continue to borrow against your paycheck, the more you’ll end up owing.

If you want to know just how much a payday loan could cost you, consider this fact from the Center for Responsible Lending: “If a typical payday loan of $325 is flipped eight times, the borrower will owe $468 in interest; to fully repay the loan and principal, the borrower will need to pay $793.”

3. Taking Out a Bigger Mortgage Than You Can Afford

It may be harder to get a mortgage these days, and many would argue that’s a good thing. But get approved and watch out: The bank might have more faith in you than you ever realized.

For example, most lenders who approve you for a mortgage believe your debts should be limited to no more than 36% of your gross income each year. That sounds reasonable from the outset, but is it?

Consider this: Using the 36% rule, a family that makes $50,000 per year with no other debts could feasibly take out a loan with a payment equal to $18,000 per year. That’s $1,500 bucks per month, a huge sum of money for a family making close to the median annual income in the United States. And consider a debt-free family pulling in $100,000 — according to many lenders, they could “afford” to repay $36,000 per year, or $3,000 per month. Says who?

We’ve written about why you should buy less house than you can afford. The bottom line is this: You are the only one who knows what you can and cannot afford. Don’t base your borrowing decision on what the bank says. Follow your gut.

4. Paying Full Price for a Time-Share

Nobody wants to endure a time-share presentation while they’re on vacation, but they sure do know how to lure you in. And sometimes all it takes is that free gift, breakfast buffet, or special perk to pull you into that room for 90 awkward minutes. But what happens if you actually like what they’re selling?

It happens all the time. Unsuspecting vacationers end up in a time-share presentation only to walk out the door with a shiny new week of vacation heaven. The problem is, time-shares are incredibly expensive for what you get in return.

According to the most recent data from the American Resort Development Association, the average time-share costs around $19,000 and the annual maintenance fees cost an average of $660 per year. And you know what that fee represents? A commitment.

Even worse, most time-shares have practically no resale value. Don’t believe me? Look up “time-shares for sale” online and you’ll find thousands of listings for $5 or less. Even though a time-share can be a good value for certain families with predictable vacation habits, the fact that you can snatch one up for $1 means something is up. And what’s generally up are the upfront cost and ongoing fees.

The bottom line is this: If you want a time-share, buy one on eBay for $1.

5. Using a Debt Settlement Firm

No one likes being in debt, but if you really want out, do you need a third party involved? Debt settlement firms will say yes, and will not only offer to walk you through the process, but they’ll also offer to negotiate payments with your lenders and take the lead throughout the entire process.

Unfortunately, they don’t do anything out of the kindness of their hearts. First off, many debt settlement firms are simply storefronts for high-priced lawyers who will charge 10% to 20% of your debt to handle your case.

And the debt settlement firms who work with you one-on-one aren’t doing you any favors either — most will collect your monthly payments and let your accounts fall into the red for several months before trying to negotiate with your creditors. In the meantime, your debts will accrue interest and late fees until your hero can swoop in for the kill.

But what if they can’t? The fact is, some of your creditors may not be willing to work with the debt settlement company you choose, and you may not know this until it’s far too late.

The federal government also warns that there could be tax consequences for debt forgiveness. According to the Consumer Financial Protection Bureau website:

“If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.”

Another warning from the CFPB:

“Warning: Debt settlement may well leave you deeper in debt than you were when you started.”

The bottom line: If you want to get out of debt, do things the old-fashioned way. Get a part-time job, cut your expenses, and start piling all of your extra money toward your debts. Then keep going.

How to Sniff Out a Bad Financial Move

All of these financial moves are ones you’ll be better off skipping altogether, but they aren’t the only bad moves out there. The truth is, bad financial advice is all over the place.

Ask anyone who has ever cashed out their 401(k) to buy a boat. They know.

The problem is, it’s not always easy to tell the good advice from the bad. And sometimes, the financial moves you shouldn’t make are the ones that make the most sense. The next time you’re on the fence about a specific financial move or investment, ask yourself these questions:

  • Will this help me in the long run? This is a good one for almost any situation. Payday loan — good for today, bad for tomorrow. Spending student loans on a trip to Miami – good for today, bad for tomorrow. You get the picture.
  • Would I be embarrassed to tell people about this? Yet another solid way to tell if your financial plans might spell disaster. If you don’t want people to know about it, it’s probably a bad idea.
  • Would (insert financial guru here) approve? Whether you follow Dave Ramsey, Suze Orman, or David Bach, ask yourself how they would view your situation. If the answer is “denied, denied, denied,” then you know what to do.
  • Does someone else benefit from my decision? If the answer is yes, beware. Debt settlement firms that charge huge upfront fees are an excellent example. And don’t get me started on those time-share salespeople. If someone else is benefiting from your decision, stop and think before you let them.

The Bottom Line

When faced with a big financial decision, you should always look out for yourself and your family first, and question any business or service that offers to “fix your problem” or “help you out” for a fee.

Whether it’s about borrowing money you’ll have to pay back or taking out a loan when you shouldn’t, you should always try to make your life easier, not harder. And remember, no matter what, nobody cares more about your money than you do.

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