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1. Don’t borrow from your 401(k) unless you absolutely need the money.
Financial planners agree that in times of financial strain, don’t be cavalier about borrowing from your 401(k)! “401(k)s are not savings accounts,” says Armstrong. If you must borrow from a 401(k), he explains, during the next quarter you will be required to repay the amount (either in quarterly installments or out of your paycheck) over five years (unless you borrowed for a mortgage, in which case you have a longer time, such as 10 or 15 years depending on your company’s plan). That means if you borrowed $5,000, you’ll have to repay $1,000 per year in four $250 payments.

Can’t make a payment? Whatever you do not pay back will be considered taxable income at your usual tax bracket, plus a 10% penalty fee.

It’s better to scale back on your 401(k) contributions rather than take money out of it, Armstrong says. He suggests scaling back to the minimum amount that your company will still match.

2. Don’t ignore: (a) car or mortgage payments, (b) student loans, (c) credit card bills, or (d) all of the above.
The answer is (d), of course! “Don’t miss a payment or be late on a payment,” warns Lauren Lindsay of Personal Financial Advisors in Houston, Texas. She says that each late payment will result in a 100 point drop on your credit score and it will take you up to six months to earn those 100 points back. Lindsay advises that you may a small payment – as little as $10, even – to show you’re exercising “good faith” by paying what you can. Furthermore, ignoring bills in the mail isn’t necessary because creditors often say they’ll work with folks who are having difficulty repaying loans. “The important thing is to talk with creditors about the situation,” Johnne Syverson, a financial planner in West Des Moines, Iowa, says. Don’t be afraid to ask if you can push back the loan repayment reschedule for a few months.

3. Want to eat out or play a few rounds of golf? Okay, just don’t put it on your credit card.
People have difficulty cutting back on something they enjoy doing; they feel that golfing helps them relax or that they’ve earned a steak dinner at Ruth’s Chris Steak House (RUTH). “Instead of cutting back on eating out, they just put it on credit cards,” says Roman Franklin, a financial planner in Deland, Fla. If you can’t afford to pay for discretionary purchases out-of-pocket right now, why assume you’ll be able to pay for it with interest later? Stick to a budget and allot yourself some fun money, within reason, but don’t just whip out the Visa [V] and tell yourself you’ll pay it back when your Christmas bonus comes.

4. Don’t make pricy purchases, even if there is a sale or your fancy new toy might be a cost-saver.
“Don’t buy a new car thinking you’re going to save gas!” Warns Erin Baehr, a financial planner from Shawnee-on-Delaware, Pa. Baehr says she’s heard about people buying hybrid cars to cut back on gas money, but they end up getting gouged by the interest rate on car payments. The same goes for those ‘buy furniture now, pay for it next year’ deals. “Try not to make large purchases that aren’t necessities,” she says.

5. Don’t quit your job unless you have another job lined up.
It can be difficult to suck it up when you feel trapped in a cubicle prison during your nine to five. But unless you’ve got bankable skills that will translate into freelance or consulting, don’t put your family at risk by quitting a job and becoming an ‘entrepreneur.’ Likewise, try extra-hard not to do anything that would get you fired. “Place nice at work,” Armstrong says. “A positive attitude is an asset.”

This entry was posted on Monday, July 28th, 2008 at 10:16 am and is filed under FSBO. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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