Some financial disasters are a long time in the making. It typically takes years of unfortunate choices — minimum credit card payments, forgone savings opportunities — to create suffocating debt or a poverty-level retirement.
Other disasters you can trigger almost instantly. The decision itself costs money, or the clock starts ticking toward a consequence you might not have foreseen. Here are three common ways to trash your finances fast, plus how you may be able to undo or limit the damage.
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Cash out your 401(k)
Withdrawing even small amounts is an expensive mistake, even a 401(k) loan to consolidate debt, 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Cash-outs trigger taxes and penalties that can eat up $250 to $500 for every $1,000 that’s withdrawn.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% 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. The point is that 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, and the toll only grows with time.
Miss a credit card payment
You get busy. There’s a family crisis. Money’s tight. The statement never arrives. Whatever the reason, you don’t pay your credit card bill. You catch up the next month and figure you’re just out a late fee.
You may be out so much more.
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. (The penalty for “poor” credit can be $1,000 or more.) Credit scores can matter more than any other factor, including driving record, when determining premiums, Consumer Reports found.
Try to hide from the IRS
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% per month of the unpaid bill. The failure-to-file penalty is 10 times that: 5% per month. Plus you’ll owe interest on the balance.
If a return isn’t filed, the IRS can Frankenstein one together based on the information it collects from employers, financial institutions and other government agencies. Then the agency can pursue you — relentlessly — for what it says you owe. It can seize wages and bank accounts, put liens on homes and even pursue criminal charges against people who refuse to pay. Ask actor Wesley Snipes, who served more than two years in prison for willfully failing to file returns.
You can fix it
Most people can limit the damage from unpaid taxes even after years have passed by filing any missing returns, paying as much of the tax owed as possible and setting up an installment plan for the rest.
Other mistakes, though, have a much smaller window for making a correction.
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. You’ll also have to dig into your pocket to cover the 20% that’s usually withheld or that portion will be taxed and penalized.
Paying a credit card bill late but before the account is 30 days overdue turns a painful credit score hit into a credit non-event. The lapse won’t be reported to the bureaus or calculated into your scores. The issuer might even waive the late fee if you ask (and if it’s the first time).
Even if it’s too late to prevent the fallout this time, keep in mind that everyone makes money mistakes. The ones who wind up with more money tend to be the ones who learn from those mistakes.
Liz Weston is a certified financial planner and columnist at NerdWallet, a personal finance website, and author of “Your Credit Score.” Email: firstname.lastname@example.org. Twitter: @lizweston.
This article was written by NerdWallet and was originally published by The Associated Press.