3 Ways You May Be Throwing Money Away Without Realizing It

How common financial decisions like buying a house or car can go terribly wrong.

How common financial decisions like buying a house or car can go terribly wrong.
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"We're certainly a nation in love with automobiles, and I'm right there with the crowd," Halliwell says. "Even so, I'm forever amazed at the number of $40,000 to $50,000 cars and trucks I see on the road every day. The payments on those loans are huge by average financial standards, and the cars are often worth thousands less than the purchase price within days of buying them."

Many experts suggest ensuring that the car you buy is no more than 1/10th of your gross annual income. So if you make $70,000 a year, you shouldn't buy more than a $7,000 car. Even if that doesn't seem realistic, it's a good blueprint to try to follow. After all, six years is a long time to lock yourself into paying for a car, which depreciates the moment it is driven off the lot.

"I regularly get questions from people about what they can do to fix their auto loan situation when only three years into their six-year loan term, their circumstances change and they can no longer afford the payment," Halliwell says. "Unfortunately, in many cases, they owe thousands more on the loan than the vehicle is worth, so they're often stuck."

Withdrawing money from your retirement plan for anything other than retirement. Yes, times are still tough for some people, but short of dredging up money to save your house from going into foreclosure or raising ransom money for a kidnapper, most financial gurus will tell you to stay away from your 401(k) or individual retirement account.

[See: 12 Money Mistakes Almost Everyone Makes.]

"Too many people take money out of a qualified plan or IRA to pay for everyday expenses. The Department of Labor has a word for this: 'leakage,'" says Kenn Tacchino, professor of taxation and financial planning at Widener University in Chester, Penn.

How devastating can it be? Tacchino says that when he is in the classroom, he offers his students this example:

"A 25-year-old is getting married and he wants to buy a $5,000 engagement ring. He is in the 28 percent marginal bracket and he will pay a 10 percent penalty to take the money from his IRA. He will need to take out $8,064 to buy the ring and pay the taxes. He throws caution to the wind and takes out the $8,064. Five thousand goes to buy the ring, and $3,064 goes to taxes. Had he kept the money and earned an 8 percent rate of return, he would have had over $195,000 at 65 for retirement. That's quite a ring!"