Woman using calculator on desk full of bills and statements © Sheer Photo, Inc/Photodisc/Getty Images
The title of my new e-book is "There Are No Dumb Questions About Money." No, seriously. Asking questions is the way we learn how to handle our finances, and the only dumb question is the one you don't ask.
There are, however, plenty of dumb answers to money questions, as well as lots of stupid solutions to money problems. Desperate people looking for a quick fix often wind up in far worse holes than when they started (thanks, sometimes, to the unhelpful ministrations of whole industries dedicated to taking advantage of them).
If you have got a money problem, here are some of the stupidest "solutions" to avoid, along with some alternatives.
Borrowing from a payday lender
Payday loans seem convenient. You don't have to have good credit -- you just have to be employed or getting regular benefit checks, from Social Security, unemployment or other sources.
But you'll pay at least $15 for every $100 you borrow through a payday advance company, according to the Center for Responsible Lending. That fee for a two-week loan translates into an annual interest rate of about 400%. Worse, most borrowers who take out these risky loans come back again and again, the center's studies found, either to roll over their existing loan because they can't pay it off or to borrow more. Either way, they rack up more fees.
Payday lending doesn't solve the underlying problem, which is often poor money management. Many people who start taking out payday loans just keep borrowing until they default. Then what started as a quick fix turns into a nightmare of collection calls and, sometimes, bankruptcy court.
A payday loan isn't a reasonable solution to either a temporary crisis or a chronic shortage of funds. Your best bet is to avoid the need for an emergency loan by building up a small cushion, even if it's just $500. Other alternatives:
- Get some budgeting help. If you're chronically short of cash, a budgeting counselor can help you track where the money goes so you can get expenses in line with your income. The National Foundation for Credit Counseling can help.
- Turn to your community. Food banks, clothing banks and other community resources can help you cover the necessities when you're broke. If you're poor, you may qualify for government help with groceries, housing costs, utilities and child care (check with Benefits.gov).
- Sell something. Raise money fast with a yard sale, an online auction or an online classified ad.
- Ask your employer for an advance. Some companies will let you tap your next paycheck for free or a small fee.
- Ask a family member or friend for help. Even if you're charged interest, you'll pay far less than you would to a payday lender.
- Take a cash advance from a credit card. If you have a credit card, you can tap it for emergency cash. The interest rates are high -- often more than 20% -- but better than those for a payday loan.
Buying a car from a 'buy here, pay here' lot
Lending to people with bad credit got a lot less popular after the financial crisis. While credit standards have eased somewhat, many people still have bad or nonexistent credit and have trouble getting a loan.
"Buy here, pay here" lots have sprung up to take advantage of the situation. Dealers mark up the prices of older, high-mileage cars to sell to people with few other options. Financing comes with high interest rates, usually around 24%, and borrowers are often required to make their monthly payments in person (the better to repossess the car, if necessary). A single missed payment leads to repossession, so the dealer can sell the car again.
If your hoopty finally bites the dust and your credit is lousy, you don't have many good options. A few charities try to hook up the working poor with wheels, among them Ways to Work, 1-800-Charity-Cars and Cars 4 Causes, but there are typically far more applicants than available cars, according to an investigation last year by the Los Angeles Times.
If you can scrape together $2,000 or $3,000 in cash, you may be able to get a decent car deal from a private seller via eBay or Craigslist, advises Edmunds.com, a car research site. Or consider applying for a car loan from a local credit union. These member-owned organizations typically have better rates and more flexible lending terms than many mainstream banks do.
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Failing to pay your taxes
Some people don't file their taxes because they're disorganized or don't realize they should. Every year, about a million people who are owed refunds don't file, according to the Internal Revenue Service, potentially forfeiting up to $1 billion in total of their own money.
Other people don't file their returns because they can't pay what they owe. That, every tax pro will tell you, is stupid, stupid, stupid.
Why? Because the penalties for failing to file are 10 times higher than the penalties for failing to pay. Also, the IRS has installment plans to help those who can't pay their bills all at once. In some cases with older tax debt, you (or, more likely, your tax adviser) can negotiate a settlement.
It's extremely unlikely you'll slip under the IRS' radar. Instead, the agency will use the documents filed by your employers, financial institutions and others to construct a "substitute" return, which probably won't give you all the tax breaks to which you're entitled.
Then things can really get ugly. If the IRS decides you owe it money, it launches the collection process, which can include:
- Wage garnishment.
- Levies on your bank accounts.
- Filing a federal lien against your property.
Tax liens can be particularly onerous, since they're reported to the credit bureaus and they'll trash your credit. In addition, there are no statutes of limitations on tax liens -- they won't disappear from your credit report until seven years after they're paid. If liens aren't paid, they can stay on your reports indefinitely.
If you can't face the IRS, hire someone to face it for you. Enrolled agents are an affordable alternative to CPAs and can represent you in front of the IRS. You can get referrals from the National Association of Enrolled Agents. If your debt is big, consider hiring an attorney who specializes in "tax controversy" (that is, fights with the IRS).
Raiding your retirement funds
One of the most common questions I get (after "How do I improve my credit score?") is "Should I take money out of my retirement funds?" The reason for the raid varies -- usually it's to pay debts, but sometimes people want to use the money for a down payment on a house or to pay a tuition bill.
There's rarely a good enough reason to tap your retirement funds. Most people aren't saving enough in the first place and can't afford to lose what they've already accumulated. Every $1,000 you withdraw in your 20s will cost you $10,000 or more in lost future retirement income, assuming 6% annual returns. That's true even if you wouldn't pay a hefty tax penalty -- which, most of the time, you will.
Unfortunately, most people don't ask my permission before they take a hardship withdrawal or cash out their account when they leave their job.
Cashing out is horrifically common. A 2011 Aon Hewitt study found that 42% of people leaving their jobs cashed out their retirement plans. The study, which looked at all kinds of "leakage" where money was pulled from retirement accounts, warned that cash-outs were by far the worst "due to the prevalence of the behavior and the magnitude of the impact." The researchers estimated that cash-outs could reduce participants' future retirement income by at least 11%, and possibly as much as 67%.
The bottom line: You're going to need every penny you can save between now and retirement age if you want to spend your last years in anything approaching comfort. Don't squander your retirement savings on other goals, no matter how worthy you think they are at the moment. Chances are, you will live to regret it.
Living in denial
One of the questions in my book came from a man making one-third of what he did before the recession -- yet many of his big expenses stayed the same. He didn't want to take his kids out of private schools or cut back on vacations, even though those expenses no longer made sense on his current income.
That kind of denial isn't uncommon. People pay 40% or more of their salaries for shelter, then wonder why they can't make ends meet. Or they take out massive loans for education, never stopping to consider whether they'll be able to afford the payments. Or they simply spend more than they make, month after month, digging themselves an ever-deeper financial hole.
It's human to be optimistic, to hope things will get better. But optimism that isn't tempered by reality can turn into something else: delusion. If you can't face your true money situation, you're unlikely to create real solutions to your problems.
Any of the following could be signs you're living in denial:
- You're living paycheck to paycheck -- if your money even lasts that long.
- You're carrying credit card debt, and you have no real plan for paying it off.
- You're not saving for retirement, or you're not sure if you're saving enough.
- You have no emergency fund.
- You know a big bill is coming up, but you haven't put aside money to pay it.
The solution? Snap out of it. Track your current income -- not what you made last year, or before the recession, or what you hope to make someday. Compare that with your expenses. See what you can trim to make room for retirement savings, emergency savings and debt repayment. Ditch your excuses, along with any self-recrimination for not having done this already, and get 'er done.
Being realistic about your situation and crafting a financial plan isn't easy, but it's also not rocket science. It's just the smart thing to do.
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