Not every money move is a good one, but some can come back to really haunt you.
Consider these potentially scary money moves: Borrowing money for your children’s education; helping a friend by co-signing a lease or mortgage; and, opening an account to get an attractive benefit. These money moves could be a force for good or, if they go awry, they could haunt you for years.
The good news is that with some preparation and research your employees can avoid these financial nightmares and the financial stress that comes along with them.
Here are three financial decisions that could come back to haunt your employees along with some ways they can limit the damage.
1. Accepting loan terms without crunching the numbers first
Student loans are one of the biggest financial burdens for employees. Millennials are overrun with debt but their parents have, in many cases, co-signed for those loans and often have separate loans as well.
Much of the problem comes from borrowers being unprepared to pay these loans back out of the income they’re able to earn after graduation. It’s easy for borrowers to accept student loans without thinking twice – especially when it seems like everyone else is doing the same – but without some planning and forethought, these loans can wreak havoc on your employees’ finances for years, limiting their opportunities for buying a home and saving for retirement. That’s why it’s so important to crunch the numbers before signing your name to the loan documents.
While we started off by talking about student loans, this logic applies to car loans and mortgages, too. Before accepting the terms (and the money), encourage your employees to estimate their future monthly payments and make sure it’s an amount they can comfortably afford.
Otherwise, they’ll end up having to make hard decisions years down the line, like moving back home to afford their student loan payments or having to sell and downsize to a more affordable house. It seems simple, but taking a few minutes to run the numbers can help your employees avoid committing themselves to a future they can’t afford.
2. Co-signing without understanding the pitfalls
When you co-sign a loan, it’s often to help a child, relative or friend obtain something they couldn’t get on their own, like a loan or a lease. It’s a kind, helpful gesture, but also a risky one because it makes the co-signer legally responsible for the payments – the whole payment, should the person who signed the loan default.
Your employees might think they’re only being nice by co-signing a loan for a family member or friend, but make no mistake: if the original signer defaults or even stops making payments temporarily, the co-signer will be left footing the bill.
That could mean they’re stuck paying for two homes, two cars or an education they didn’t receive. It may also affect their credit history (which will now be tied to the credit of the co-signer, and may get dinged when payments are missed) and their ability to qualify for future loans.
You and your employees don’t have to refuse every request to co-sign (many parents help their adult children this way), but they need to take the responsibility seriously and understand the ramifications. Co-signing can evoke strong emotions, but it’s OK to voice concerns if the situation doesn’t make sense. Talking through the options could lead to a solution where your workers aren’t putting their finances at such a huge risk.
3. Opening accounts on the spot
Retailers often ask customers to sign up for store-branded cards at checkout, promising a moderate one-time discount or no interest for six months. Airline-branded credit cards often do the same in airports offering large sign-up bonuses and sometimes the deals seem too good to pass up. Unfortunately, these offers almost always have a downside.
The cardholder might have to spend a certain amount – much more than they normally would – in the first few months to actually receive the points or, if the card promises no interest, they could be charged interest retroactively for not paying off their entire balance by the end of the introductory period.
Suddenly the lure of a free flight has gotten your employees deep in debt and stressed over paying their monthly bills, when a quick read of the fine print would have shown them the important deadlines and details they needed to know.
If your employees routinely open new accounts without checking the fine print, they could also put themselves at risk of having their personal information stolen. The more companies that have this data, the higher the risk of it being exposed. And when your employees get in the habit of freely giving out details like their social security number, it could simply be a matter of time before that decision comes back to haunt them.
As we’ve learned, regularly reminding your employees to make smart money decisions does make a difference, so take action to help them avoid these terrifying fates.
For more information about Best Money Moves, email [email protected].