Seven Seemingly Smart Financial Decisions That May Actually Backfire
We all struggle with money. About 17% of Americans report that they didn’t pay all their bills in the previous month, and about a third of us were unable to save $400 for an emergency. Inflation and stagnant wages are part of the problem, of course, but so is a lack of serious financial education . Money isn’t always just about math, because there are many different forces – cultural, political and macroeconomic – that influence how it behaves. This makes it difficult for many people to control their finances.
This is why you can cut your budget and still struggle. Sometimes a financial decision seems like a shot in the arm, a great idea that can’t be lost, but in reality it’s the worst thing you can do with your money – like these seven money moves that seem like they should work in your favor but actually can’t. quit. the financial situation is much worse.
Zero interest financing
Getting a 0% financing deal for a purchase or balance transfer seems like an amazing idea: you can buy something today (or pay off a balance that’s bleeding out with interest payments) and over a certain period of time (six months to two years, depending on the specific offer) you will not have to pay interest on the loan.
Why this seems reasonable: You can get something you want or desperately need (a home renovation or a new TV) and pay it off slowly without incurring interest payments, or you can get rid of the interest on existing debt and pay it off with some money . breathing room.
Why this could backfire: Besides the fees associated with balance transfers, which can negate the 0% interest rate benefit, you have to be very careful about paying off those balances before the end of the promotional period—otherwise, you’ll often end up in shock with all deferred interest and other penalties . And 0% interest loans can cause you to spend more than you should or keep using credit cards after you’ve discharged your balance, deepening your financial hole.
No credit card
Credit cards are a gateway to debt and financial chaos: It’s easy to overspend and then get caught in a doom loop where you pay an ever-increasing minimum payment while your balance gets bigger and bigger. Obviously, a smarter solution is to not have a credit card at all, or to have a card that you only use in emergencies and pay off immediately.
Why it makes sense: Not having plastic temptation in your wallet means you can’t be talked into buying something you can’t afford, and you’ll never have to worry about a balance you can’t pay off.
Why this could backfire: Credit cards are one of the easiest ways to establish and improve your credit score (payment information makes up 35% of your score ), and not having open credit accounts can hurt your score , making it harder to get a loan. whenever you need. Plus, buying things with credit cards provides a lot of protections in case you get scammed or have a dispute with the company, and it can save you financial fat.
Overly aggressive saving or debt reduction
You’re determined to have not just an emergency fund, but a lifestyle fund, a pile of money so big that you’ll be covered for any emergency or opportunity that comes your way, or you’ll invest every extra penny into your retirement savings. so you can be sure of a comfortable old age.
Why this seems reasonable: How can saving money or getting out of debt be bad things to do? Having a ton of cash stashed away is like a warm security blanket, and if cutting debt is always a smart move, then attacking that debt with a financial sledgehammer should be a good idea.
Why this could backfire: Being overly aggressive about saving and servicing debt could mean you don’t have enough money left over for other bills—if you put a large amount on your credit card and then have to write it off plus a little more to cover those monthly bills, you’ve made your situation worse. The money in most savings accounts, even high-interest accounts, likely won’t keep up with inflation either, meaning it actually loses value every year. And once you put your money in tax-advantaged retirement accounts like a 401(k) plan, you won’t be able to access it easily or without paying stiff penalties, so if you overdo it and need to pay the money back to cover expenses, it it it will cost you.
Exchange rewards for money
You have a credit card that offers a rewards program, and you have the option of redeeming your points for cash, either as a balance payment or as a deposit. It’s a nice little bonus, so why not put a little extra money in your pocket?
Why this makes sense: You’ve already spent the money that earned those points, so who cares? Every dollar you get from redeeming those points reduces what you actually spent in the first place.
Why it might backfire: While it’s great to get something in return for your purchases, cashing out rewards points is almost always the worst way to use them. Rewards points typically have a cash value of a penny or less , and that value drops even further when you convert them into cash. This is why loans or cash payments are almost always the worst deal . You’ll get more value by using these points in almost any other way.
Travel at competitive prices
You’re looking to save a penny wherever you can, and if that means you have to put some effort (and travel) into it, you’re okay with that. You’ll drive an hour to get a big deal or cheap gas.
Why it seems smart: You pay less for the things you need to buy (like gas), so it seems like a no-brainer.
Why it might backfire: Traveling for a good deal requires some math if you want to be sure it’ll pay off. You have to take into account the costs of travel—like the gas you burn to get there. You should also figure out how much you’re actually saving. If you drive half an hour to save, say, 15 cents a gallon on 10 gallons of gas , you’ll save a whopping $1.50, meaning you’re valued at a princely $3 an hour on your personal time. If the savings are significant, it may be worth it, but chasing discounts is a sure way to waste time and possibly even lose money in the long run.
Buying in bulk
You need things to live – food, pantry supplies, household cleaning supplies, etc. You know you use a lot of these things throughout the year, so you decide to buy them in bulk ahead of time to save some money.
Why it seems smart: Honestly, sometimes buying in bulk is pretty smart: Buying in bulk can be a great strategy for saving money since it usually means lower unit prices. Most warehouse-type stores that allow you to buy items in bulk offer some pretty good deals on items.
Why it might backfire: Buying in bulk comes with hidden costs, including warehouse store membership fees, and if you don’t use up your stock quickly enough, you could end up losing some to spoilage and breakage, ruining the deal. In addition, bulk purchasing encourages over- purchasing. If you buy a pallet of something just because you can and it’s supposedly cheap but you never use it, you haven’t gotten a deal, you’ve wasted your money.
Buying a house that’s too big
Buying a home is generally considered a smart financial move. When you start house hunting, your mortgage broker encourages you to go big – you qualify for a truly staggering mortgage amount, so why not? After all, the bank wouldn’t have loaned you all that money if it didn’t think you could pay it back.
Why it makes sense: A more expensive home is usually larger, newer, and has more amenities. Plus, the value of a home typically always goes up , so you’ll be investing in it from day one—it’s an investment, after all. And, as the pleasant mortgage broker explained, the difference in monthly payments is small. A $300,000 home might have a monthly payment of $1,850, while a $350,000 home might have a monthly payment of $2,100—that’s just an extra $3,000 per year!
Why this could backfire: Buying the largest possible home you can borrow on puts you in a dangerous position. While your mortgage payment won’t change (unless you took out an adjustable rate loan), everything else can and probably will. Property taxes , homeowners insurance, flood insurance and maintenance costs are almost guaranteed to rise over time. If you buy a house that you can barely afford today, you may very well end up poor tomorrow.