Monday, March 2, 2009
Ten Ways Not To Find Money in Troubled Times
Money. Everyone is looking for ways to find more of it these days. We've seen lots of advice on ways to find extra money in a pinch. But today personal finance experts Ken and Daria Dolan of Dolans.com expose 10 ways NOT to find extra money in a pinch.
If you need to get your hands on some extra money now, these might seem like easy solutions to your money problems. But in the long run, they can cost you a bundle.
1. Loan on Your 401(k)
Don't do it!! Your 401(k) is not a piggy bank. That money is for your retirement and retirement alone! So unless it's an absolute emergency, do not touch it. Even though you're paying the money back into YOUR account, you still have loan payments to make. Those loan payments may very well eat up the money you COULD have used to contribute more money to your 401(k). Plus you'll pay back that loan with money you've already been taxed on... and then when you finally withdraw it at retirement, you have to pay taxes on it again! Double taxes. What a waste!
2. Cash Advance on Your Credit Card
Need quick access to some cold, hard cash? Your friendly credit card company would be more than happy to help. They make it super easy to take out a cash advance, put you'll pay through the nose for the privilege. Cash advance loans carry an OUTRAGEOUS interest rate -- usually 20-25! And that doesn't even include any transaction fees. Oh, and here's the kicker…there is NO grace period with a cash advance. You start owing interest the SECOND you take out that money!
3. Tax Refund Anticipation Loan
Once upon a time, if you were owed a tax refund, you actually had to wait for Uncle Sam to send it to you. Well, in our recent "I want it NOW" economy, the refund anticipation loan (or RFL) was born.
These loans may be "convenient," but they are anything but cheap. By the time you add up the loan application fees along with finance charges, rush fees and more, it'll cost you a pretty penny to get an RFL. (Expect to pay $50 or more for a mere $200 refund!)
4. Payday Loans
This is another short-term loan that can really rake you over the coals. Say your rent or mortgage is due on the 1st of the month but you don't get paid until the 5th... and you don't have two nickels to rub together to pay that rent. That's what the payday loan company is for. They'll loan you anywhere between $100 and $1,000 (depending on your state) and will charge you as high as 100% or more for the privilege! On top of it all, since the payments are so high, borrowers find themselves short of money before their NEXT paycheck and have to do it all over again...
5. Car Title Loan
You should avoid title loan companies at all costs. Here's how it works: You give them your car title in exchange for an exorbitantly high interest loan. What's exorbitant -- try triple digits. We've seen rates of 250% from some of these loan sharks. People with severe money problems think they'll just pay the loan off early and avoid that high interest. Instead, they end up NOT able to pay at all one month... and they then lose their car.
6. Cash in Life Insurance
Where do we start?! This is a bad idea all around. First of all, it means your loved ones no longer have the insurance protection you know they need. Second, if you cash out your life insurance policy, you'll owe income tax on any amount you receive that's OVER what you paid in premiums. And as with most things things that get you cash fasts, there are fees involved! We've also been asked about borrowing against your policy, but that's not better. If you die before repaying the loan, that loan amount will be subtracted from the death benefit and your family will pay the price!
7. Break a CD
While it may be tempting to break a CD that's earning a paltry interest, here are two big reasons not to -- interest and penalties.If you cash in a CD before it matures, you'll owe an early-withdrawal penalty. The amount varies but is typically three months worth of interest on CDs of less than 18 months or six months of interest on 2+ year CDs.
So to put it in perspective, cashing in a two-year, $10,000 CD earning 4% would cost you about $200.
8. Home Equity Line of Credit
A home equity loan used to be a super simple way to get cash. The fact that so many of us used our home equity like a piggy bank is part of why we're in this financial mess! But today, with housing values plummeting and banks clamping down on lending, many of us couldn't get a home equity loan if we tried.
Even if you could, we don't recommend it unless it's a last resort. Not only will you have less (possibly even ZERO) equity in your home in the event of a true emergency, but you'll also have a hefty monthly loan to pay every month.
9. Pawn Shop
Sure, you can get "cash on the spot" at a pawn shop... but you'll also get far LESS cash than if you sold your precious goods on your own! Pawn shops LOVE people in money trouble. They know that a desperate person is willing to part with a sentimental piece of jewelry or work of art because they need the money. They take advantage of that by paying only a tiny fraction of what the piece is worth. Here's a better idea: If you really need to sell one of your valuables, take it first to a jeweler or other appraiser and see how much it's worth. Then sell it on the open market (garage sale, Craig's list, classified ad, etc.).
10. Gold Parties
Gold parties are all the rage. A host invites you to a wine-and-cheese shindig where you bring any gold trinkets you're willing to part with -- jewelry, coins... even teeth! You get paid a certain amount for the goods (depending on the weight and quality) and leave the party with some cash. Sounds good, right?
Not so fast. Even though gold is fetching close to $1,000 an ounce, you won't get top dollar. If you really want to sell your gold, go to a legitimate dealer to do it.