Watch out for these financial products.
When you’ve got financial concerns, many people want to give you their two cents: from television advertisers and magazine articles, to solicitation emails that offer a variety of ways to make ends meet. Unfortunately, there’s no magic solution to our financial difficulties. In fact, if we’re not careful, we may exacerbate our financial problems by choosing the wrong financial products for our circumstances.
Financial products are not “one size fits all” and many of them may not be right for you. Certain products should be avoided as much as possible, while others warrant a careful look to see if they truly fit your needs:
Financial Products To Be Careful About
1. Bank Accounts With Too Many Fees
With so many free checking and high yield savings accounts available today, why pay bank fees? Monthly maintenance fees, annual fees and per check fees are unnecessary expenses in today’s competitive banking market. Check out and compare online banks to find top savings bank rates that are available today.
2. Interest Bearing Credit Cards
If you don’t pay your credit cards in full each month, you’ll be paying an interest on your debt balance. Usually, you get 3 weeks to a month to pay your credit card debt without getting slapped with the typical 10% to 25% (or more) in interest rate charges. This means that if you make only the minimum payment, it can take you 20 years to pay off a $1,000 credit card!
Tip: Carefully review interest rates on purchases versus cash advances. Case in point: Household Bank claims to offer a 7.9 percent variable APR on purchases but a closer look reveals their default APR is 29.49 percent with 25.15 percent APR charged on cash advances.
3. Retail and Specialty Credit Cards
Stores and specialty organizations lure you into their credit cards with low introductory interest rates, bonus merchandise and rewards programs. However, most retailers charge interest rates in excess of 17 percent so having an unpaid balance can cost you more than the incentives are worth. For instance, as a hook, the Target Guest Card donates 1 percent of purchases to your favorite local school. But its current interest rate is 21 percent! Even with 10 percent discounts on in-store purchases, this card is an expensive proposition unless you pay off your balance in full each month.
4. Credit Cards With Extra Fees
Check out the terms and conditions of your credit card carefully. Some credit cards charge a monthly maintenance fee of up to $10, costing card holders over $100 annually. With so many credit cards to choose from, you should be able to avoid those charging any maintenance or annual fees. One of the worst credit cards around? Check out Aspire, a card that clearly aspires to separate you from your money.
5. 401k Debit Card
401k debit cards give us quick and easy access to any loan accounts we establish against our retirement funds. This way, we can get access to our retirement funds via ATMs. Since 401k loans that are not promptly repaid will be considered as early withdrawals and will trigger a 10 percent penalty with tax expenses, I find the 401k debit card to be a dangerous financial tool.
6. Detrimental Mortgages
It may be best to avoid certain mortgages, depending on your personal financial circumstances. Do review the repayment terms, interest rates and conditions of any mortgage loan you are considering:
ARM Mortgage. An adjustable rate mortgage (ARM) is exactly what the name implies. The rate fluctuates with the defined ARM indexes. If interest rates soar, borrowers may be faced with a monthly mortgage payment increase of $100 to $300 or more. This unexpected increase can wreak havoc on your budget. The unpredictability of an ARM mortgage makes it difficult to set up a solid financial plan.
Balloon Mortgage. This is another dangerous mortgage. Smaller, fixed rate monthly mortgage payments are made for a set term with larger, ballooning payments at the end of the term. It is not uncommon for homeowners to be unable to cover the increased payment at the end of a balloon mortgage term, thereby jeopardizing the security of their largest asset.
Interest Only Mortgage. These mortgages charge 100% interest payments for a specific period of time but eventually, you have to start paying off the loan. Unfortunately, this means you are paying a lot of money in interest without making headway on your principal. You can consider this one of the most expensive mortgages to get.
Jumbo Mortgage. Jumbo mortgages allow people to secure very large mortgages that are above the set industry standard for “loan limits”. They require a 5 percent down payment with interest rates that are typically higher. These factors make a jumbo loan very costly and risky, making it difficult for borrowers to handle if rates shift upwards.
7. Payment Protection Insurance
Mortgage companies and credit card companies love to market payment protection insurance policies, but do you really need them? Usually, the policies are overpriced, have many exclusions and cover few circumstances. Instead of buying into payment protection insurance policies with few benefits, why not use the money to create an emergency savings fund?
8. Extended Warranties
I normally do not pay for an extended warranty. I’ve never had to make use of one and have been happy about avoiding the extra fees that come with a warranty. But there may be situations wherein a warranty may be worth your money, particularly if it covers big ticket items. Some warranties involve paying certain costs, shipping the item or visiting a faraway location to get service. In these situations, it might be more affordable and timely to pay for a local technician to repair the item. For small items, extended warranties are usually a waste of money. Why not just buy a replacement, rather than waiting for repairs to be made under warranty?
9. Certain Insurance Products
Some insurance products may be “overkill”. Pet insurance, travel insurance and wedding insurance may not be necessary in most cases, though in certain circumstances, could be worth the premium. But how about cash value life or universal life insurance? I am partial to term life insurance, the cheapest form of life insurance available. I prefer to address my investments independently of my insurance needs.
Also, why would you buy life insurance for your children? Life insurance is intended to replace the income of a family breadwinner. Unless your child is supporting your household, life insurance for children is a waste of money. You’re better off establishing a high yield savings account (such as those offered by HSBC Direct) for your child, buying savings bonds and planning for their college education rather than purchasing life insurance for them at such an early age.
10. Annuities For The Young
You may get a sales pitch from an insurance company about the wonders of annuities. But keep in mind that annuities are basically “retirement products” that try to control your investment risks, as they attempt to provide you an income stream in your later years. In exchange for higher costs and lack of liquidity, annuities offer your investments some protection from risk along with tax deferral, but you can achieve the same thing with proper asset allocation, diversification (minus the costs and lack of liquidity!), and by investing in traditional retirement accounts.
11. Pay Day Loans
It may seem like an easy and convenient way to score some quick bucks, but pay day loans are a very bad deal. When you’re in a bind, you may think it’s your only way out, but realize that payday loans come with a very high price. Many payday loans cost a minimum of $20 per $100 borrowed. Imagine this: if you borrow $500 today, you will have to repay $600 at a later point. If you can’t repay the loan, you’ll wind up extending the terms and paying even more fees! This can create a vicious cycle of high-cost payments that you never catch up with.
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I left a comment and it got rejected. What I said was true and you know it. The light of day will find this site. good luck
Good information – thanks for the tips. With regards to life insurance, there are some instances where permenant policies are useful. For instance, in estate planning needs. However, I would strongly recommend buying a policy that you know you’ll be able to afford 5 or 10 years from now. For most people, term is most affordable.
GHL,
I’d like to know what you mean? I am a bit confused by your commentary. Would appreciate some context.
Stacey mis-characterized annuities using descriptions such as try to and attempt to in describing how they work. The correct word is guarantee. She also wrote that they had higher cost and (liquidity) she meant not liquid. That is not true. Fixed and fixed index annuity have no cost. Stacy says they are not liquid. Compaired to what are they not liquid? The stock market? The bond market? Real Estate? CD’s? Checking accounts? Money market account? Then she says you can make your own home made annuity that is better. Not true. Wharton School of Business and Moshe A Milvesky, PHD both have studies that show home made annuities don’t work. She also fails to take into account all the fees and cost that are associated with her recommendations, which are well documented by John Bogle, DALBAR and many others. If you are giving advice do it with full disclosesure. It is not fair to the readers. I listed the common fees and cost associated with equities yesterday and you deleted it. It is your site, suit yourself. Good luck
@GHL,
I apologize for the deletion of your earlier comment but it wasn’t very clear (the latest one you provided is quite clear though!). I do appreciate your thoughts. The lack of liquidity argument for annuities simply means that they are less liquid than other financial vehicles. You pay a surrender charge if you try to get your money out of annuities (in general). There’s a place for annuities, but for younger people, it makes better sense for them to diversify and perform proper asset allocation to control their investment risks while seeking reasonable returns. I just don’t see why young people should be buying annuities, I really don’t. But to each his or her own.
There are many young people who purchase annuities and they work well for them, but in general they are not for young people who need money for many things such as housing, cars, and babies.
The problem that has become apparent to me is the real returns on equities are far lower than the return touted by advisers. The SEC cost calculator shows the effect of a 3% fee over 20 years. Fees and foregone earnings are over 40% of the value of the return. I have looked at the cost of advice i.e. commission based, fee based, and fee only. The striped out cost of advice is at a minimum 2% and when you add management, turnover, and other cost most people don’t have a chance. That was the point that seems to be overlooked by most people in the financial industry. The myth that 12.5% return minus adviser fees, management fees, timing and selection penalties, turnover cost and taxes equals 12.5%. The math says different.
About surrender charges, if your surrender charges are 12%, that is your total down side and it is a voluntary charge. A question: Do you think the market could take away 12% of your account? If yes, was that voluntary surrender or non voluntary surrender charge?
If you have to be in the market, own all of the market through a very low cost (.2%) index fund like the s&p 500.
@GHL,
I absolutely agree with you on all you said about fees and charges. I am big on index funds and my core portfolio is with index funds of all sorts. The fees on annuities can add to already existing fees and charges (even though it is voluntary) and that was what we wanted to express here.
This article does not flat out rag on annuities — our point here is that financial products are not “one size fits all”, and while it may work for others, it may not work for you (and vice versa). So the key is to evaluate them carefully and see if they fit your circumstances and requirements.
In general though, if you really want participation in the stock market, then index funds are a prudent approach to take.
GHL, thanks once more for your thoughtful comments.
There are two reasons I can think of to consider life insurance for young children. If your child develops an illness or handicap they may become uninsurable later in life. If they already have a policy, that policy would not be cancelled based on the medical change so they would continue to have at least that coverage. Secondly, horrible as it sounds, funerals are terribly expensive, if the unthinkable happens and your child dies, at least, in the middle of your grief, you wouldn’t have to worry about how you were going to afford to bury them. Life insurance for healthy newborns is very cheap. I bought a $25,000 Whole Life policy for my son when he was born for $10 a month.
Great post! There is some really great info here. I agree with you about buying life insurance on children…many people wonder why anyone would ever do this. Usually, plans are really cheap and cover $5 or $10 k to cover funeral costs. The other reason is if the child is prone to certain genetic diseases and they will not qualify for life insurance later in life. If you buy it when they are young and healthy, they can renew it each year as adults and maintain affordable premiums.
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