Some financial disasters are a long time in the making. It usually takes years of unfortunate choices — minimal credit card payments, forgone savings opportunities — to make suffocating debt or even a poverty-level retirement.
Other disasters you may trigger almost immediately. The choice itself costs money, or so the clock begins ticking toward a consequence you might not have foreseen. Here are three common ways to trash your finances fast, and you might be able to undo or limit the damage.
Withdrawing even tiny amounts is a costly mistake, and the damage is worse that the younger you are.
Cash-outs trigger penalties and taxes which could eat up $250 to $500 for every $1,000 that is pulled. That money can be achieved with the click of a switch — but also lost are all the future tax-deferred gains that money might have made.
Figure a $1,000 withdrawal prices $4,000 or more in future retirement income, assuming a 7 percent annual return compounded monthly more than 20 years. The tab doubles, to $8,000, in case you are 30 years out of retirement. It doubles back to $16,000 or more with 40 years to go.
This is a theoretical example, because actual returns will be different. The purpose is that any money taken from a 401(k) is no longer earning tax-deferred yields, and these returns can’t earn their own yields. The foliage which works wonders when you invest works against you when you withdraw, and the cost only grows with time.
MISS A CREDIT CARD PAYMENT
You get busy. There’s a family catastrophe. Money’s tight. The statement never arrives. Whatever the reason, you don’t pay your credit card invoice. You catch up the next month and figure you are only out a late fee.
You may be out so much more.
A single missed payment — just one that is 30 days or more late — can drop fico ratings by 100 points or more. That turns great credit to average, or worse, which might mean higher rates of interest and a greater chance of having turned down for credit. Recovering from this drop can occur as long as three years.
The cost can ripple well beyond credit accounts. A Consumer Reports analysis found that individuals with merely “good” credit may pay hundreds of dollars per year more for auto insurance than people with excellent scores. (The penalty for “bad” credit can be $1,000 or more.) Credit ratings can issue more than any other factor, such as driving record, when deciding premiums, Consumer Reports found.
What’s worse than owing a lot of money to the IRS? Failing to submit a tax return after you spend money on the IRS.
The penalty for failing to pay taxes on time is 0.5 percent per month of the unpaid bill. The failure-to-file punishment is 10 times which: 5% each month. Plus you’ll rely on the equilibrium.
If a return is not filed, then the IRS can Frankenstein one together based on the information it collects from companies, financial institutions and other government agencies. Then the bureau could pursue you — relentlessly — for that which it states you owe. It can grab salaries, seize bank accounts, place liens on houses and even pursue criminal charges against individuals who refuse to pay. Request actor Wesley Snipes, that served more than two years in prison for willfully failing to file returns.
HERE’S HOW YOU CAN FIX THESE MISTAKES
Most folks can limit the damage from unpaid taxes after years have passed by submitting any missing returns, paying as much of this tax owed as possible and establishing an installation plan for the remainder.
Other mistakes, though, have a much smaller window for creating a correction.
You may turn a glimpse right to a rollover by depositing a 401(k) test to an IRA or a present employer’s plan, for example, but you need to do this within 60 days from the date you get the money. You will also need to dig into your own pocket to cover the 20 percent that is generally withheld or that portion will be taxed and penalized.
Obtaining a credit card bill late but before that the account is 30 days delinquent turns a debilitating credit rating struck into a credit non-event. The lapse won’t be reported on the agencies or calculated to your own scores. The issuer might even waive the late payment if you ask (and when it’s the very first time).
Even if it’s too late to protect against the fallout that time, remember that everybody makes money mistakes. The ones who wind up with more money are usually the ones who learn from these mistakes.
Liz Weston is a licensed financial planner and columnist in the personal finance website NerdWallet.