This month’s Men’s Health has an excellent little article by Jeff Stevenson on how to avoid three costly mistakes.
- Borrowing from your 401(K). This is a big mistake for two reasons. First, the money you take out will no longer be accruing interest. Second, you repay your loan from your 401(K) with after-tax dollars and pay taxes when you withdraw cash at retirement. You’re taxing yourself twice on the same money.
- Purchasing whole life insurance. While the whole life insurance never expires and might grow each year, you have to pay thousands of dollars in premiums. They’re not really efficient investment instruments. If you’ve been investing, term life insurance is probably the better way to go. A 20-year policy for $500,000 will only set you back a few hundred dollars a year.
- Applying for an interest-only mortgage. Why is this bad? If you take out a 30-year, $250,000 mortgage with an interest only term of 10 years, after 10 years of monthly payments adding up to $175,000 you’ll still owe $250,000. However, you’ll only have 20 years to pay it off, so your monthly payment will go up. While you can deduct the interest in taxes, you’re still going to end up paying more over the long haul; thus, the tax benefit is mitigated.