We've all heard the standard personal finance fare about saving more and spending less, repeated ad nauseum, so we were pleasantly surprised when five original money strategies floated across our radar recently. They are extreme, and not for everybody, which is why they're not on the lips of every finance guru out there. But for some people, they might just work.
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1. Buy a vacation home as soon as possible.
Casey Weade, a vice president of Howard Bailey Financial and a certified financial planner, says young people in their twenties and thirties should not only buy a first home, but should also consider buying a second home. As long as a young person is otherwise debt-free and on top of their finances, he argues that a second home can serve as a forced savings vehicle, a kid-friendly vacation spot, and a retirement home down the road.
"If you're in a neat area, then you can rent it when you're not there and let the place pay for itself," he says. Weade, who is moving to North Carolina, plans to take his own advice and look for a vacation home near the beach.
The downside: If your expenses go up or you lose your job, a second home is the last thing you want on the books. Also, rental income isn't guaranteed, and hidden costs from extra insurance to unexpected repairs abound.
2. Take out life insurance on your parents.
After maxing out his Roth IRA, Weade decided to take out a life insurance policy on his father. Then, when his father dies, he will collect the payout. Weade acknowledges this strategy will sound morbid to some, but he insists that it makes sense. "He's in really good health at 61, and I'm 25. In 30 years, I'll be 55 and he'll be over 90, and there's a low chance of living that long, so I'll get that tax-free benefit by age 55," he explains.
Weade calculates that his returns, after paying for the policy, will be at least 10 percent. "You have to be in a great relationship in order to do this. [Parents] have to understand the purpose and why it's beneficial," Weade adds.
The downside: If parents outlive a term policy, it may never pay out, and by that time, the insurer might not be willing to re-issue another one, explains Rita Cheng, a financial adviser with Ameriprise. (Some term insurance policies are convertible, she adds, which means they can be converted to cash value or a permanent policy prior to the end of the term.) Cheng says she doesn't usually suggest that people take out life insurance policies on their parents, but in some cases, life insurance policies that are structured properly can be a tax-efficient way to pass on wealth from parents to children.
3. Open up an extra credit card account.
People who take the "credit cards are evil" message to heart can find themselves in trouble when they want to borrow money for a house or car, since lenders want to see some experience with credit. Opening up credit card accounts and paying them off on time each month can help build a solid credit history and avoid that predicament. That way, when you need to take out a big loan for a house or a car, lenders will be competing for your business. (Other ways to build credit include opening utility accounts in your own name. Becoming an authorized user on accounts owned by others, such as spouses or parents, can also help.) Multiple accounts also provide an extra buffer in case of accidental account freezes, lost cards, and other problems.
The downside: If an extra credit card serves as a temptation to spend more, it can lead to a debt snowball effect.
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4. Overpay the IRS.
Most Americans make the mistake of overpaying the IRS throughout the year. Many financial experts point out that anyone who does this is floating Uncle Sam a loan free of charge. But is doing so really a mistake? Getting a tax refund every April can serve as a method of forced savings (or splurging, depending on one's priorities).
Getting a slightly higher paycheck every two weeks instead of that April bonus can make it harder to track the extra money. Tax refunds, on the other hand, are easy to track, since taxpayers receive the money in one lump sum. An ING Direct survey found that most refund recipients save the money or use it to pay off debt. The average refund is $3,000, according to the National Endowment for Financial Education, which is no small safety net.
The downside: The financial experts are right. If you overpay, you are giving the government a free loan, and you might need the extra cash to cover ongoing expenses.
5. Skip insurance on everything but the big stuff.
Liz Pulliam Weston, author of The 10 Commandments of Money, says most consumers get insurance "exactly backward," insuring small items such as cell phones or gifts put in the mail, but then under-insuring themselves when it comes to car, health, and even life insurance. "You don't want insurance to cover what you could pay yourself out of pocket. Insurance should be reserved for catastrophic expenses—those you couldn't easily cover on your own," she says. If you lose your cell phone, for example, chances are, the cost of buying a new one wouldn't break the bank, at least compared with needing a sudden appendectomy or even antibiotic.
One problem with the insurance market is that some financial planners stand to benefit financially from selling their clients certain types of insurance. (Stick with fee-only advisors to bypass this conflict of interest.) Weston recommends doing your own research instead of saying "yes" to expensive, cash-value life insurance, for example. Cheaper term insurance, which offers coverage for a set number of years, is often the smarter move.
The downside: If you tend to lose your cell phone often, you're on the hook for hefty replacement costs.
What do you think—could these extreme money moves work, or are they just crazy?