Marco Rubio's Financial Stumbles Offer Lessons on What Not to Do

NEW YORK (TheStreet) -- It's not often a national political figure emerges as a poster child for what not to do with your finances.

As The New York Times reported this week, Sen. Marco Rubio, (R, Fla.)  has been plagued by money problems for much of his career. Some of the GOP presidential candidate's troubles were of his own making, which serves as a cautionary tale for the rest of us. Here's a rundown of some of the bigger fiscal do's and dont's committed by Florida's junior senator.

Looting His Retirement Accounts

On one of his biggest mistakes, Rubio liquidated a $68,000 retirement account to pay for a refrigerator, among other expenses, the Times says. Financial advisers rail against this type of thing all the time. Yet the sad fact is many Americans tap into their retirement savings all too often.

Here's why it's a bad idea.

First, if you withdraw  money directly from your 401(k) -- or a traditional IRA, for that matter -- you face an immediate tax hit. And if you're under age 59½, you'll generally pay a 10% penalty as well. (There are exceptions to that.) The Internal Revenue Service collected $5.7 billion in penalties in 2011, according to this Bloomberg story, so it would appear lots of people are making this mistake.

Even worse, that money is gone, meaning you'll lose the growth you could have had over the years from leaving the funds in the account.

Assuming you have to pull cash from your retirement savings, the lesser of two evils would be to borrow from your 401(k), if your plan allows it. At least in that case, it's a loan in which you are paying yourself back, though you'll still lose out on your growth for as long as the money is out. The downside is that if you leave the company before the loan is fully repaid, it may be treated as a distribution and become subject to those tax penalties. Plus, the IRS caps the amount you can borrow at $50,000.

Failing to Resist the Urge to Splurge

If you're lucky enough to get a cash windfall or a hefty raise or bonus, fight the temptation to go out and reward yourself, especially if your savings rate has been less than stellar. According to the Times, Rubio bought an $80,000 boat and leased an expensive Audi. The better choice, especially if you've been through a period of financial instability, is to pump up your savings, especially those aforementioned retirement accounts. Try to increase your contribution to your 401(k) by at least enough to get the full employer match, if one is offered.

Another fairly standard technique is to always bank your raise. Since you weren't living on that extra cash before, you won't miss what you never had in your budget If your finances have been especially wobbly, use the money to create an emergency cash fund equal to three to six months of your household expenses.

Buying Too Much Real Estate

Owning multiple properties is expensive. There are taxes, upkeep, paying the mortgage and more. The senator apparently acquired three homes in a relatively short period of time, ballooning his debt. During the last housing bubble, people were buying and selling homes at a frenzied pace, counting on rising values to cover them. So when the crash came, it was brutal. Though it seems obvious now, never buy more house than you can afford. How to know what that number is? Several online calculators can help you figure it out. Then, scale that amount back by a further 10% to 20% just to be safe. Also, consider that renting may be a better choice for you. This calculator shows which is more advantageous depending on where you live. 

Now, let's look at a few things he did right.

Setting Up College Funds Early

Rubio opened education savings accounts for his children at birth, the Times says. That's a smart move. Without going into all the issues of the high and rising price of higher education these days, you're likely to need a significant amount of cash to pay for your children's education, no matter how or if the system is reformed. Getting an early start on that is huge.

Refinancing His Mortgage

Rubio refinanced the mortgage on his primary residence, according to the article -- another smart move, especially if his new interest rate is substantially lower. While rates have moved up from their record lows, there still may be good deals in your area. Bankrate is currently showing a 4.00% refinancing rate for the Hartford, Conn. area.

So what if you absolutely need cash? A better first step may be trimming your expenses to improve your cash flow. Have a fancy cable package? Drop it. Two cars? See if your family can get by with one. Eating out a lot? Rediscover the joys of cooking. Like expensive holidays? Try a staycation.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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