Everyone loves a pint of Ben and Jerry’s now and again — a pint, mind you, not whatever joke of a portion they consider to be a “serving.” The problem is, that’s just shy of 100 grams of sugar. If that’s all you eat, you’ll be in sad shape come beach time.
The same goes for personal finance.
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No one could be blamed for taking out a high-interest loan in a moment of desperation or paying only the minimum balance when money is tight. But overall, in terms of long-term habits, financial junk food is as bad for your budget as actual junk food is for your body. GOBankingRates identified 10 of the most egregious cases of financial products, services and decisions that are the money equivalent of eating Oreos for breakfast. Avoid them altogether if you can, and always avoid them in quantity.
Last updated: June 25, 2021
Payday Loans
The secret is out that payday loans are a form of predatory lending designed to trap people who are already struggling in an endless cycle of debt. In an effort to rebrand, you’ll now often see them called “small-dollar loans” or “short-term loans” — but it’s the same old money trap. According to the National Foundation for Credit Counseling, 1 in 10 Americans has signed for one of these high-cost, no-credit-check loans at one point or another.
Although some states cap the interest rates they can charge at a crushing 36%, many others do not, and interest rates can be as high as 600%. For a $1,000 loan, a 600% APR produces a finance charge of $500 in a single month, which forces many borrowers to request extensions, and the debt snowballs into eternity.
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Penny Stocks
Penny stocks tantalize investors with the dream of getting in on the next Apple or Amazon while share prices are still just a few bucks or even a few cents. The opportunity to buy into a juggernaut on the ground floor is a tempting proposition, but as the old adage goes, if it sounds too good to be true…you know the rest.
Penny stocks — a name given to a class of sub-$5 stocks issued by tiny and unestablished companies — are not subject to the same disclosure rules as legitimate securities. They’re much riskier, much more prone to scams and criminality, and — since they trade at low volumes — they’re susceptible to “pump and dump” scams, where just a few traders can conspire to inflate the price and then sell.
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Day Trading
Just as penny stocks are an enticing lure for investors looking for shortcuts, so, too, is the strategy known as day trading. In both cases, virtually all investors would be better off socking their cash in an index fund and waiting for the market to work its magic.
The polar opposite of long-term investing, day trading involves fast and frequent trades made throughout the day in an effort to accumulate lots and lots of small gains. It’s a risky proposition that leads to steep losses for the majority of people who try it.
Do you think you’re good enough to time the market and read all the angles? Maybe you are good — even very good — but you can bet the house, the dog and the farm that you’re not as good as the Goldman Sachs computer algorithms that day traders are in direct competition with.
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Multilevel Marketing
Some multilevel marketing (MLM) operations are technically legitimate, but they all put you in the uncomfortable situation of not only selling things to your friends and family but recruiting them to join you in doing the same to their own network of friends.
That’s the best-case scenario.
The reality is you’re more likely to stumble into a pyramid scheme with MLM rackets than virtually any other kind of money-making endeavor. People who run pyramid schemes make wild promises about earning potential, but it’s all contingent upon bringing new victims — your friends and family — into the fold, then for them to do the same to their friends and family.
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Timeshares
Timeshares are like financial quicksand. They’re easy to stumble into, incredibly hard to get out of, and once you’re stuck, the more you struggle, the worse your situation becomes.
An in-depth University of Central Florida study produced nearly identical results as research conducted by the timeshare industry itself — about 85% of people who buy into timeshares regret their purchase and wish they could get out of their agreement.
That’s usually a losing battle. In almost all cases, timeshares — and their costly annual maintenance fees — are for life. It can be nearly impossible to legally exit the agreement, even with expensive lawyers on your side. If you simply stop paying, there will be legal consequences and your credit will implode. Consider timeshares to be the financial equivalent of face tattoos — make sure you’re really, really sure before you commit.
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Risky Mortgages
Lenders offer all kinds of mortgages designed for all kinds of lenders, but some are especially risky for almost all kinds of buyers. Among them are:
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Adjustable-rate mortgages: You have no way of knowing what you’ll pay over the long term with ARM loans — when interest rates rise, your monthly payments rise right along with them.
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40-year fixed-rate mortgages: Even at a fixed rate with lower interest, you’ll pay more with this kind of dragged-out loan in the long run.
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Interest-only mortgages: These kinds of loans start off cheap because you pay only the interest during the first few years, but when the principal starts amortizing, your monthly payment soars — and you have to pay off the principal by an agreed-upon date.
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ARM interest-only mortgages: Here, you get the worst of both worlds, an unpredictable interest-only mortgage, and an even more unpredictable ARM.
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Paying Your Credit Card’s Minimum Balance
Making only the minimum payment on your credit card can keep you in good standing in a pinch, but when paying the smallest amount possible becomes a habit, you’ll be taking two steps forward and one step back for the personal finance equivalent of eternity.
The minimum payment is usually between 1%-3%, according to Experian. With the average credit card APR averaging between around 15%-25%, that arithmetic becomes a financial boat anchor around your neck. By paying your statement balance every month, you’ll avoid finance charges altogether and take full advantage of whatever points, miles or rewards you accumulate.
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Cord-Cutting — and Cutting and Cutting and Cutting
Streaming media has allowed millions to ditch their cable contracts and the three-figure monthly bills that come with them, all while binge-watching what they want when they want for much less. All of that is true — until you start doubling and tripling down.
No one can live without Netflix, right? But if you’re an Amazon Prime member, you’re already paying for a massive library of original and on-demand programming — but not live TV. That requires a subscription service like Hulu + Live TV, which will run you $65 and delivers even more programming overlap. It doesn’t take long for this kind of service stacking to meet or exceed what you would have paid for premium cable.
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Bottled Water
It costs 2,000 times more to drink bottled water than tap water, according to Business Insider, and the average gallon of bottled water costs three times more than a gallon of milk and four times more than a gallon of gasoline. With brands like Pur and Brita able to purify dozens of gallons of water per filter, there’s no reason to contribute to the plastification of the world’s oceans. Also, bottled water is no better than what comes out of the tap in most cases.
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The Lottery
If you plan on spending money on the Powerball, lotto, lottery, scratch-offs or any other form of gambling where the government doubles as a bookie, do yourself a favor — invest that money instead. The lure of money for nothing is tantalizing, but the odds of ever winning a prize substantial enough to make up for what the average person spends on tickets every month is somewhere in the neighborhood of zero. People who are struggling financially are much more likely to blow their precious dollars on government gambling than more affluent people, which makes the lottery kind of like an extra tax on the poor.
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This article originally appeared on GOBankingRates.com: Money Moves That Are the Equivalent of Financial Junk Food