9 Bad Financial Decisions That Will Plague You for Years

Avoid these financial decisions at all costs.

In my spare time, I like to browse personal finance advice forums and check out money diaries. While it's entertaining to read about other people's financial situations, I've also found it informative.

When you check out enough firsthand experiences, you start to see what works and what doesn't. You'll notice what the most successful people do to save money and pick up on some common mistakes that lead to long-term financial struggles.

1. Letting a debt go to collections

If you don't make payments on a debt and it goes to collections, you can kiss your credit goodbye. This can drop your credit score by over 100 points, and it takes seven years for collections accounts to drop off your credit file.

Your credit score will gradually improve during that time if you do everything right. Even so, you'll feel the effects of that collections account for years.

For example, if you want to buy a house or get any sort of loan, you can expect to pay significantly higher interest rates. You might even have your application denied.

2. Buying an expensive car

Here's a mistake I see all the time: A person will look for advice because they can barely pay their bills. This same person posts their budget, only to show they've got a car payment for several hundred dollars per month.

There's nothing wrong with buying a car, even if you need to finance it. But your car shouldn't cost more than 10% of your gross income.

Consumers often think they should splurge on an expensive car just because they can afford the payments at that time. A year or two later, they're struggling -- in part because of that huge car payment -- and they can't even sell the car without taking a loss.

3. Withdrawing retirement funds early

Some people see their retirement accounts as money they can tap into when they want some extra cash, but that's a bad way to look at it.

Depending on the type of retirement account you have, you may need to pay penalties and income tax on the amount you withdraw.

And remember: One of the main benefits of retirement accounts is they allow your money to compound and grow much larger. When you withdraw money, you're taking a step backwards.

4. Financing purchases instead of saving for them

With the prevalence of zero-interest financing programs, it's tempting to finance big purchases whenever you want something that's out of your price range.

This can work out well if you pay off your balance within the zero-interest period, but don't get into the habit of financing your purchases. It's easy to finance too much and end up with monthly payments taking up a large chunk of your income.

5. Waiting to get insured

People often put insurance on the back burner, thinking they won't need it right away. But the whole point of insurance is to protect yourself from the unexpected. There's no way to know when you could need it.

The last thing you want is $40,000 in medical bills because you put off getting health insurance. And being the victim of a burglary without renters or homeowners insurance is a terrible ordeal.

If there's any type of insurance policy you need, make it a priority to set it up. 

6. Carrying balances on your credit cards

While carrying a balance on a credit card doesn't seem like a big deal at first, it can quickly spiral out of control. Before you know it, you owe $4,000 on your Chase card, $3,000 on your American Express, $1,200 on your Nordstrom card, and so on.

The smartest way to use credit cards is to be a "transactor." Use your cards for the security and rewards they offer, but never carry a balance.

7. Falling for schemes and scams

Before you make any decisions related to money, do some research and fully understand what you're getting into. There are far too many get-rich-quick schemes, supposed opportunities to "be your own boss," and companies selling subpar financial products with all sorts of hidden fees.

A search online and 15–20 minutes of reading is often enough to sniff out the truth behind these schemes. Those minutes can save you from wasting your time and money.

8. Buying more home than you can afford

Most of the time, when someone buys a home, they plan to live there for a long time. That makes it tempting to choose the absolute best home you can find, even if the mortgage payment doesn't leave you much wiggle room in your budget.

It won't be much fun living in that nice home if you're struggling to pay your bills every month. Mortgage lenders typically want your monthly housing costs to take up no more than 28% of your gross income. Avoid getting a mortgage that will cost you more than that. If you have additional debts, you may need to shoot even lower.

9. Being a cosigner

Whether it's for a credit card, a personal loan, an apartment rental, or anything else, being someone's cosigner is almost never a good idea.

When you cosign, you're putting your credit score and financial stability at risk. If that person doesn't pay, it can tank your credit and you could be liable to pay back the remaining balance.

Don't let one mistake ruin your finances

Not every financial mistake is a big deal, but some have serious repercussions that affect you for years. It's important to know what these mistakes are so you don't make them yourself and end up regretting it later.