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.

Dealing with Confusing Personal Finances - Good Debt and Bad Debt

 One reason why you find so much conflicting advice out there is because personal finance is personal. There is no one-size-fit-all solution.

You may get a lot of data and math, yet when the numbers force you to do something that lies outside your comfort zone; it is not a good solution.

So what can one do? How can one make sense of numbers and align our habits and calculations with the official math? This is something we shall try to answer in this article.

First of all, let’s talk about…
Good Debt and Bad Debt

 There is no such thing as ‘good debt’, no matter what experts say. There is nothing called good debt even if you use it to pay for college or to buy a house. Dave Ramsey, one of the most well-known financial experts, is one who is strictly against this idea that debt can be ‘good’.

At the other end of the spectrum, Robert Kiyosaki, the writer of the well-known book Rich Dad Poor Dad, says that the wealthy use good debt to grow their financial worth. They use it to invest in cash flowing assets and use money from investors and banks.
Debt Elimination

Financial experts don’t just disagree on the question of debt, but also offer different advice on debt elimination and debt management. However, here are two most common debt elimination strategies.

    Debt Stacking Method: In this strategy, you start paying off your debt that has the highest interest rate first. As you can understand, many experts swear by this strategy as it enables you to free up cash faster. For instance, if you have several credit cards with debt, start paying off the one that has the highest interest rate.

    Debt Snowball Method: Other financial experts tell you that you tackle that debt first that has the lowest balance. It is believed that a system that is front-loaded with rewards is good for keeping one on track. Small victories keep one going.

Now, paying off those debts that have a high interest rate is certainly a smart move. However, personal finance is not always a math equation. It is also ruled by emotion, in which case the Debt Snowball Method works better. Personal finance is psychological as well.