What not to do with your money

(CNN) -- From that latte addiction to another pair of shoes you just have to have, everyone makes some missteps with their money. But there are some mistakes you should never fall into.

Here's what not to do with your money:

Don't tap into your 401(k) retirement fund too early.

But more and more people are doing just that. There was a 20 percent increase in hardship withdrawals for people trying to save their home, according to Great-West Retirement Services, an organization that provides retirement products for employers.

Last year, 18 percent of employees took out a loan from their 401(k) or 403(b), a retirement account for public education and nonprofit employees. That's up from 11 percent in 2006, according to the Transamerica Center for Retirement Studies, a nonprofit retirement research group.

Of the people borrowing money, almost half said they needed the money to pay off debts. That's a significant increase from 27 percent in 2006.

"If you are borrowing money to pay off your mortgage, you're sabotaging yourself," said Frank Boucher, a retirement expert at Garrett Financial Planning.

Why? You're getting taxed twice. When you take a loan from your 401(k), you are required to pay it back -- with interest -- in five years.

Remember, you paid taxes on the money you used to pay the loan back and you pay taxes again when you withdraw your account. Plus, tapping into your 401(k) also means you're missing out your money's ability to compound until retirement.

If you are faced with high credit card bills or you've been hit with unexpected bills, like an un-reimbursed medical expense or an expensive car repair, consider some alternatives before tapping your 401(k).

Remember you can always stop contributing temporarily to your retirement fund. Of course, this will be limiting your ability to make money with compound interest, but it may fatten your paycheck by a hundred dollars or so.

You may also consider taking out a home equity line of credit, even though the credit crunch has made it harder to qualify.

It's not only 401(k) mistakes that can lead us astray.

'Buy now, pay later' can really hurt your credit.

"It seems like a good idea," Ulzheimer said. "But people tend to buy more than they intended because they don't have to pay it back right away."

When you sign up for in-store financing all you're really doing is getting an installment loan through a finance company, according to Ulzheimer. It ends up on your credit report that you have a loan you're not paying down for months, or even years.

Unlike a traditional loan that you pay down immediately, an installment loan will hurt your credit score for a longer period of time since the principal isn't decreasing.

Beware if you miss the first payment. The amount may have to be paid off in full by the end of the free period, consumer advocate Edward Dworsky warns.

If you miss that payment, you'll have retroactive interest that could be over 18 percent. And don't forget, these buy now, pay later ads are usually offered on higher ticket items.

"Having to pay 18 percent or more on a big screen TV isn't worth it," says Dworsky.

In addition, finance companies are generally seen as lenders of last resort, Ulzheimer said. You'll look like a risky borrower if you have a finance company on your credit report.

If you're required to take out a store credit card to take advantage of a 10 percent discount or a zero percent financing offer, your credit score will also be hurt because you're basically giving the retailer the ability to pull your credit report.

That lower score count means you'll get a higher interest rate when you apply for a mortgage, a car loan or any other kind of personal loan. You don't want a $30 savings today to cost you $10,000 in the future.

Help out a friend or family member by co-signing on a loan is a big risk.

If you sign your name, you are personally responsible for that loan in case the original borrower makes late payments or defaults. If you co-sign a loan and your friend or relative misses a payment, the lender can immediately collect from you without going after the borrower first in many states.

And it does happen. Three out of four co-signed loans wind up being paid by the co-signer, according to the Federal Trade Commission.

In addition, you may not realize that co-signing a loan can hurt your own ability to get credit.

Since a co-signer is legally obligated to pay the debt, the loan will show up on your credit report, too, and it will factor into your debt-to-income ratio. In addition, the amount you owe may be increased -- by late charges or by attorney fees -- if the lender decides to sue to collect. If the lender wins, your wages and property may be taken according to the Federal Trade Commission.

If you must co-sign a loan, there are steps you can take to protect yourself. First, ask the lender to send you a written notice if the original borrower misses a payment. That way you'll get a heads-up about any future trouble.

You may also be able to negotiate the specific terms of your obligation. For example, you may be able to limit your liability to just the principal on the loan, excluding late charges, court costs or attorney fees. In this case, ask the lender to include a statement in the contract.

If you do co-sign, get copies of all the important papers, like the loan contract, the warranties and the Truth-in-Lending Disclosure Statement. You may need these documents in case there is a future dispute. Keep in mind that the lender isn't required to give these documents to you. You may need to ask for copies from the borrower.

In the long run, if you really want to help out, consider just giving your friend or family member a cash loan. It's a smarter move that can save you a lot of headaches. E-mail to a friend

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