Don’t Make These Money Moves

Sticking with the personal responsibility theme, personal finance is the area where people need to practice the highest level of responsibility, but seem to show the least.

I came across a great article at MSN Money by Liz Pulliam Weston, "The 3 Worst Money Moves You Can Make." In it she claims that “Some of today’s most common personal-finance decisions also happen to be some of the most destructive.”

She then goes on to list 3 of the primary pitfalls – and how to avoid them. Here they are with some excerpts:

1. Using a home equity loan to pay off credit card debt

Americans borrowed a total of $826 billion from home equity as of the end of 2004, according to the Federal Reserve, up from $416 billion in 1997. Low home equity rates and high credit card rate, have convinced millions this is the way to go.

The problem is, the only way this maneuver helps you is if you stop using your credit cards to run up debt. Otherwise, you’re just digging yourself a deeper hole.

Nearly two-thirds of the people who borrowed against their home equity to pay off credit cards had run up more card debt within two years, according to a study by Atlanta research firm Brittain Associates.

2. Borrowing from your 401K

People who borrow from their workplace retirement accounts love to think it’s a smart move, since when they repay the loan they’re essentially paying interest to themselves rather than to a credit card company or other lender.

But here’s the problem with that thinking: If you borrow from your 401K account and lose your job or get fired, the loan must be repaid, typically within weeks. If that’s not possible, the outstanding loan balance is taxed and penalized as a premature deduction.

3. Stretching to buy a house

Your real estate agent wants you to buy the most expensive house you can: the higher the price, the bigger her commission. Your lender knows a larger loan will rack up more fees and interest, and that you’ll move heaven and earth to pay your mortgage even when you’re falling behind on other bills.

Buying too much house could mean giving up other things you want: vacations, eating out, a college fund for your kids, a sufficient retirement kitty. Or it could mean ever more debt, as you borrow to try to maintain your lifestyle.