There are lots of reasons you might have to tap into your savings that are reasonable. 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, savings should be spent 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? But if you use your savings to make a down payment on that amazing new car that was just released, 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.”
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Buying More House Than You Can Afford
It’s nice having a house with a big yard or one that’s in a better area with better schools. And maybe 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. There are plenty of calculators 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, say, 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 in the process.
Risky investments tend to be those that promise outlandish returns, typically many times more than the average stock market return. Such eye-popping returns can undoubtedly 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 who participate in MLMs make no money or even lose money, so tread lightly.
If you have a friend or family member in need, you might be tempted to fire up your savings account and help them with what 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 can’t, not only do you put your own finances at risk, but your relationship with the person you lend the money to could be put under pressure.
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, say you take money out of your brokerage account to pay off your credit card. The credit card has a much higher interest rate than you are likely to earn in the stock market, so you might think it’s a good idea.
But taking money out of the market means you could be losing out on possible compounding. Plus, since you are depleting your savings, you could end up having 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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