There are many reasonable reasons you might have to tap into your savings. Unexpected medical bills or home repairs, covering daily needs if you lose your job, and so on. Sometimes, we find ourselves in dire straits and have no choice but to use our savings to cover these expenses.
But using your savings can become a problem when you use it for things that aren’t so essential. In general, you should spend your savings in an emergency and not anytime you happen to need some extra cash. The following are some situations that could fall into the latter category.
Financing a New Car
We all love the new car smell, don’t we? However, if you make a down payment on that amazing new car that was just released using your savings, you are probably making a mistake. “This is one of the worst ways someone can make their savings disappear,” said Cameron Burskey, managing director at Cornerstone Financial Services. “Not only are you adding a car payment, but you’re also having to pay interest on the financing, as well as increasing your monthly or annual insurance costs.”
Buying a House More Than You Can Afford
Having a house with a big yard or one in a better area with better schools is nice. You can tap into your savings to make a down payment. But if you can’t afford the monthly mortgage payment, you could quickly be headed for financial turmoil. Plenty of calculators are available to help you decide how much house you can afford, such as this calculator from Chase.
First, it’s worth mentioning that taking a vacation is often a good idea. Burnout is real, and sometimes you need a break. But it can become a problem if you are tapping into savings to cover a trip to an all-inclusive luxury resort. If you want to take a fancy trip, start a separate savings fund you’ll use to cover that trip. Put money into the fund when you can — but don’t neglect your retirement and other savings funds.
Risky investments promise outlandish returns, typically many times more than the average stock market return. Such eye-popping returns can be tempting, but that doesn’t make them good investments. Never invest more than you can afford to lose — and if you are drawing money from your savings, that’s probably money that is better left in a safer place.
Bad Business Ideas
Similar to risky investments, bad business ideas are those that promise unrealistic results without much to back them up. If a friend approaches you with a business idea, there’s nothing wrong with being skeptical. For example, if they talk to you about some great products they just started selling, it could be a multilevel marketing (MLM) scheme. Seventy-three percent of people participating in MLMs make no money or even lose money, so tread lightly.
If a friend or family member is in need, you might feel tempted to use your savings account and assist them with whatever you can. While that is understandable, what if they never pay you back? This situation is commonplace, so you shouldn’t lend money unless you can easily replace it. If you cannot do so, you put your finances at risk, and lending money to the person could strain your relationship with them.
Buying Your ‘Wants’
Whether it’s the newest iPhone or some fresh new outfits, we all feel like we “have” to spend money on things sometimes that are mere wants. But using your savings for these things is never a good idea. “Many people get sick of wearing the same clothes and feel like they need something new,” Burskey said. “They then go on an unintended shopping spree, unnecessarily spending their hard-earned savings.”
Sometimes you might have to use your savings when shopping — such as if you are laid off and have no other way to pay for groceries. But using your savings to buy a new device is something to be avoided.
Paying Off Debt
Using your savings to pay off debt can seem like a good decision at first. For example, you take money from your brokerage account to pay off your credit card. The credit card has a much higher interest rate than you will likely earn in the stock market, so you might think it’s a good idea.
But taking money out of the market means you could lose out on possible compounding. Plus, since you are depleting your savings, you could have to take on more debt once again. Instead, focus on paying your debt with the money you earn while keeping your savings intact.
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