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How to ruin your finances fast

Some abrupt decisions can ruin your financial health

Some abrupt decisions can ruin your financial health quickly. But there is a road back, experts say. Photo Credit: Getty Images / fstop123

Some financial disasters are a long time in the making.

Other disasters you can trigger almost instantly. Here are common ways to trash your finances fast, plus how you might be able to undo or limit the damage.

Cash out your 401(k)

Withdrawing even small amounts is an expensive mistake, and the damage is worse the younger you are.

Cash-outs trigger taxes and penalties that can eat up $250 to $500 for every $1,000 that’s withdrawn. That money can be gone with the click of a button — but also lost are all the future tax-deferred gains that money could have earned.

Figure that a $1,000 withdrawal costs $4,000 or more in future retirement income, assuming a 7 percent annual return compounded monthly over 20 years. The tab doubles, to $8,000, if you’re 30 years from retirement. It doubles again to $16,000 or more with 40 years to go.

This is obviously a theoretical example, because actual returns will vary. Any money taken out of a 401(k) is no longer earning tax-deferred returns, and those returns can’t earn their own returns. The compounding that works miracles when you invest works against you when you withdraw.

Miss a credit card payment

Whatever the reason, if you don’t pay your credit card bill, you will be out for a lot more than the late fee.

A single missed payment — one that’s 30 days or more late — can drop credit scores by 100 points or more. That turns great credit to average, or worse, which may mean higher interest rates and a greater possibility of getting turned down for credit. Recovering from this drop can take as long as three years.

The cost can ripple well beyond credit accounts. A Consumer Reports investigation found that people with merely “good” credit could pay hundreds of dollars a year more for auto insurance than those with excellent scores.

You can fix it

You can turn a cash-out into a rollover by depositing a 401(k) check into an IRA or a current employer’s plan, for instance, but you have to do so within 60 days from the date you get the money.

Paying a credit card bill late but before the account is 30 days overdue turns a painful credit score hit into a credit nonevent. The lapse won’t be reported to the bureaus or calculated into your scores.

Everyone makes money mistakes. The ones who wind up with more money tend to be the ones who learn from those mistakes.

What’s worse than owing a lot of money to the IRS? Failing to file a tax return when you owe money to 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 penalty is 10 times that: 5 percent per month. Plus you’ll owe interest on the balance.

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