Five Very Bad Solutions for Money Problems

Liz Weston, a columnist for MSN Money flags these five remedies for people's money problems as very bad solutions.

1.  Borrowing from a payday lender.

You'll pay close to 400% interest if you borrow $100 for two weeks from a payday loan company ($15 for every $100 you borrow.)  Customers often get quickly behind on their payments and take new loans to cover the payments due from existing loans.

2.  Buying a car from an "buy here, pay here' lot.

The dealers set prices that target people who have few options for financing a vehicle and they'll provide financing at substantially higher interest rates; about 24% is the norm.  Borrowers are often required to make their monthly payments in person, making it easier for the dealer to repossess the car, if necessary.

3.  Failing to pay your taxes.

The penalties for failing to file are 10 times higher than for falling to pay your taxes.  The IRS will customize a payment plan for those who are short of money, but they have no tolerance for those that fail to file.

4.  Raiding your retirement funds.

Raiding your retirement account for today's problems will make your future all that more problematic.  Most people aren't saving enough for their retirement and for every $1,000 you withdraw in your 20s, its costing you $10K or more in lost funds for your future retirement income (assuming a 6% annual return.)

And don't cash out of your retirement account when you leave a job."Researchers estimated that cash-outs could reduce participants' future retirement income by at least 11%, and possibly as much as 67%.".  (MSN Money, Weston)

5.  Living in denial.

Spending more than you make, month after month, will not work. Even though you might be optimistic about your future, it's important to live a life that fits within your income.

Weston identifies these common signs that you're living in financial denial:

• You're living paycheck to paycheck -- if your money even lasts that long.
• You're carrying credit card debt, and you have no real plan for paying it off.
• You're not saving for retirement, or you're not sure if you're saving enough.
• You have no emergency fund.
• You know a big bill is coming up, but you haven't put aside money to pay it.

Weston recommends tracking comparing your current income with your expenses and trimming your expenses to make room for debt repayment and/or savings. It takes practice, but it's important to learn to not spend more than you earn.

MSNMoney