A few years ago, I whipped out a seldom-used department store credit card to buy my daughter a pair of $10 mittens–because, hey, I’d get 15 percent off! What I didn’t realize is that the email-only bill went to an account I rarely checked. When I finally saw it months later, I owed $50 with interest and late fees. Oops. But the real kicker was that the overdue bill dinged my credit score right when my husband and I were applying for a home loan, disqualifying us from the best mortgage rates. In other words, I’ll be paying for those mittens for the next 30 years. They are now $9,000 mittens.
I definitely learned something from my goof (I now carry one credit card). I also take comfort in knowing that I’m not alone in flushing money down the toilet: According to a recent study, two thirds of middle-class Americans admit to having made at least one serious financial screwup. The average price of those bad calls? An excruciating $23,000.
But there’s no need for your lessons to be so costly. We convinced six women from across the country to ‘fess up to their biggest financial flubs. Their stories will teach you what not to do with your money.
“I blew a windfall”–Karen Parker, 29, Albuquerque, NM
Price tag: $100,000
“When my grandparents willed me $250,000, I thought it would finally let me realize my dreams. I was going to quit my job and become a writer–but my husband was totally against it. I wanted to go to Europe, but he hated to travel. Since the only thing we could agree on was making a big down payment on a new house, I stuck the $100,000 that was left over in our joint checking account. I figured we wouldn’t touch it, but we used it on dumb stuff: taking friends out for drinks, buying a truck we didn’t need. I was in denial until, two years later, I opened a bank statement that said we had $8,000 left. Of all that cash, I really didn’t do anything to move forward, unless you count the $3,000 I spent to hire a divorce attorney. When I think about how much money is gone, it makes me sick.”
Prevention: Make a jackpot plan.
Easy come, easy go, right? Yes–unless you create a blueprint. A simple approach to a big bonus, inheritance, or home-sale profit–or, while we’re dreaming, a Power ball payout–is to divvy it into thirds. The first chunk goes to catch up where you’ve fallen behind, like paying off debt or saving for your kids’ college costs. Another third funds future plans, like retirement or a house down payment. The last third you get to spend on stuff you want now (woo hoo!). “Create meaningful events,” Vaz-Oxlade says. Take a dream vacation or fly to see far-flung family and you’ll have great memories long after the cash is gone.
“I ignored the IRS” –Michelle Fernandez, 40, Rockville, MD
Price tag: $5,000
“Post-college, I wasn’t earning very much. So when I did my federal taxes one year–last minute, of course–and discovered I owed $300 that I didn’t have, I panicked and didn’t file. Then the next year, I tried to send in my taxes electronically, but TurboTax asked me for the previous year’s figures–so I didn’t file again. I figured, since my employer was withholding taxes, I was still paying and it couldn’t be that bad, right? Wrong. A few years later, when the IRS finally caught up with me, they wanted interest and penalties totaling $12,000–and my state tax department thought they deserved a chunk too. Only after hiring two accountants and a tax lawyer did I get it straightened out–and I was very lucky I didn’t pay more.”
Prevention: Pay up, fast.
“It’s always better to come forward than to have the IRS find you,” says Barbara Weltman, an attorney and a contributing editor to J.K. Lasser’s Your Income Tax 2013. And some states will waive penalties for rogue taxpayers through amnesty and voluntary disclosure programs, but only if you offer the info before they contact you. Yes, you’ll get slapped, but the cost might not be that high, and it’s not as hard as you think to straighten things out. The IRS.gov website spells out some options for those short on cash, including payment by credit card, installment plans, even negotiation–all of which are a much better bet than sticking your head in the sand. Because, believe us, ignoring the IRS will not make them go away.
Find the rest of the story at Redbook’s website.