For most people, each and every day involves some type of financial decision.  So how do you feel about your financial decision-making skills?  If you think you are making sound choices, ask yourself this:  Have you weighed the consequences of your choices against their apparent benefits?  In many cases, the answer is no.

Today we’re going to take a look at six common financial choices that sound like smart moves, but may leave you scratching your head wondering where you went wrong.

Advantages:

Starting a line of credit will diversify your credit sources, which is good news for your credit score.  It also allows you to access funds you may need for large purchases, like buying a car, without having to scramble to arrange the funds when you decide to buy.  Many people will also use a line of credit to consolidate higher interest credit cards and other debts and then you also get the deductibility of your interest which could be a tax advantage.

Consequences/downside:

A line of credit is too often treated like free money.  In many cases, such easy access to funds leads borrowers to rack up consumer debt for things they don’t really need.  And there’s nothing free about this cash injection:  borrowers have to make minimum payments on the line’s outstanding balance.  In addition, a balance will limit borrowing power on other loans, such as a mortgage.  Also keep in mind that when you use your line of credit to purchase something like say a vehicle, you now have your home as collateral for your car!  So, if you can’t make those payments on the line of credit, it’s not just your car they can take.  They can now take your home!

Advantages:

If you have a big debt to pay off, you may choose to either put off contributing to a retirement or savings fund, or to withdraw money from an existing fund.  The upside to this is that paying down debt is a good thing, and the sooner it is paid off, the greater the savings in interest expenses.

Consequences/downside:

By withdrawing funds set aside for retirement, you are robbing yourself of the benefits of compounding.  Also, pulling the money out of your savings could leave you in a very bad position should something unexpected, like a job loss, happen. The earlier you start saving, the more money you will be able to accumulate for retirement.  If properly invested, money saved now is almost always better than more money saved later!  Also, if the loan isn’t paid back as required, you could end up being subject to costly taxes and penalties.

Advantages:

If you invest in risk-free or nearly risk-free vehicles, the risk of losing your hard-earned cash is extremely low.  This can be a viable option, especially if you are nearing retirement.

Consequences/downside:

You are again missing out on the opportunity to have your money work for you.  You need to take into consideration your age and stage of life when deciding on your risk level.  Although everyone’s risk tolerance is different, generally speaking, the younger you are, the riskier you can afford to be.  This is because you have the time to make up any losses, and also because the higher risk is often warranted because it helps combat the effects of inflation on your portfolio’s gains.  Many times, cash is one of the riskiest places to have long-term money saved.  This is because after inflation and taxes, you are actually losing purchasing power each year.  The closer you are to retirement (or whatever goal you are saving for) the more conservative you will probably want your investment.

Advantages:

“Debt free”.  It sounds good, doesn’t it?  And it can be.  Living debt-free is a wonderful goal and can be more achievable than you might think.  So what in the world could be the downside this be?

Consequences/downside:

Debt can be used as a tool.  If, in your quest to remain debt free, you are turning down’ “good debt”, that is, debt that allows you to leverage your investments, you are doing yourself a disservice.  Examples of good debt include taking out a mortgage to buy a house (one you can afford that is!).  This is because houses and property tend to appreciate over time, and owning your home can lower your living expenses compared to renting.  You also can receive tax benefits for interest paid on your mortgage which, in many cases; will “save” you more money had you actually been saving the money.  Another example would be taking out a student loan for post-secondary education.  While student debt can be a huge responsibility, it is also an investment in yourself that boosts your potential earning power.  Or, how about a zero percent interest on purchases like appliances? If you have the cash to pay for that larger purchase, but they are offering you zero percent financing, why not kept the money in savings or investments, earn interest along the way, and come out money ahead by doing so?

 Advantages:

You’ve been working hard and saving – smart!  Before your loans start accumulating interest, or even if they have, you decide to pay them off in one payment.  That’s a wonderful accomplishment that will save you months’ or years’ worth of interest.

Consequences/downside:

If you choose this route, make sure you take a look at your interest rate.  Some loans have such a low interest rate that you’d be better off putting your money in an investment account that earns you a higher return and paying off your debt monthly.  Keep in mind this is only a good idea if 1) your investment growth is higher than your debt interest rate (if this is tax advantages interest like on a mortgage there is an additional calculation to consider) and 2) you are disciplined enough to pay the debt off on time, every month, and not to spend your hard-earned cash on luxuries instead.  The bonus?  Responsibly paying off monthly debt helps you to establish a good credit history.  This is especially helpful if you don’t have a credit history (or you are trying to rebuild a bad one).