No one charts the perfect course in life and steers it flawlessly, and financial missteps are often the tuition we pay for a degree from the school of hard knocks. But many money mistakes are avoidable with a bit of foresight. Here are a few common traps.
Failing to budget. The word budget can invoke a sense of intimidation. But most of the people who find themselves consistently falling behind have not prepared a basic accounting of inflows and outflows. Overspending problems often develop gradually until a crisis arrives.
A basic budget does not have to be a complicated process. Start by writing down everything you spend over a three-month period. Most people are surprised at just how much they spend on things like subscriptions, dining out and other controllable expenses. There are free or inexpensive apps to help track spending and even consolidate banking and credit card transactions. They can also help you track your progress monthly and make course corrections before the ship runs aground.
Insufficient saving for retirement. Grandad may wax nostalgic about his pension and gold watch after 35 years of faithful service. That world no longer exists, and for most of us, retirement investing is our responsibility. That means starting early and taking full advantage of retirement accounts like 401(k) or IRA accounts.
The keys to building a solid retirement are constancy and time. Age 65 seems far away to a 20-something fresh out of school, as any senior can attest — tempus fugit. It may be tempting to think you will just catch up later when the money is flowing in, but it is far better to begin small and early and incrementally increase your investments over a long time.
It’s also critical to mind the costs. Many investment products, including some of the funds available inside company retirement plans, have high fees and expenses that can leak from your pot of gold over 30 years. Look for broad, diversified market exposure with low expenses, and don’t hesitate to ask for help or information from the plan’s custodian.
Not having a will. Everyone knows what a will is, but a surprising number of people don’t have one. They may feel that they have insufficient assets to make the task worth the effort, they assume everything automatically goes to the kids, or they just never got around to it. Still, unless you’re comfortable with the state deciding how your assets are distributed, make a will.
Dying without a will is called intestacy, from the Latin testatus meaning witness (hence “testament” and “testimony”). The rules for distribution can get a little complicated if your spouse and children survive you, and your estate may pay more in probate expense than necessary. Yet over two-thirds of Americans do not have a basic estate plan, and about a third of those cases result in some kind of familial dispute. Get it done.
Carrying credit card debt. A recent survey by Bankrate found that nearly half of Americans carry over a balance on at least one credit card, often for a year or more. Interest on charge cards outrageous, averaging 25% and reaching as high as 33% for store-branded cards.
In the extreme, making just the minimum monthly payment is a serious wealth destroyer. For example, a $5,000 card balance might require payments of at least 2.5% of the balance each month. Making just that minimum payment, it would take 40 years to extinguish and cost you over $18,000 in interest. And bear in mind that consistently carrying over debt on revolving accounts also hurts your credit score. If you have credit card debt, move it to the top of the list to pay off.
Cosigning a loan. As loving family members, we want to help a struggling relative when we can. But cosigning a loan too often creates more problems than it solves and can complicate or even sour relationships.
When you cosign a note, you become a party to that loan and assume legal responsibility to pay up if the borrower defaults. Additionally, the transaction becomes part of your credit history, so late payments by the borrower hurt your FICO score. Try to find other ways to help. And if you choose to extend a loan yourself, be prepared to forgo the money and consider it a gift to preserve the relationship. It may be hard to refuse but will likely be in everyone’s best interest.
Being underinsured. No one likes paying for something they hope they will never need. Scrimping on insurance coverage if the budget is tight is a short-sighted and potentially costly mistake. Just ask some of the Southern Californians who opted to drop their property policies last year when premiums doubled.
Aside from the obvious coverage on home, auto and health, consider an umbrella policy to protect your assets from losses beyond coverage limits or in the event of legal action against you. Check with your agent periodically to review and update coverage as your financial picture evolves. According to NBC News, 13% of homeowners are uninsured and many more lack fully adequate coverage. Insurance is a bedrock element of a healthy financial plan.
Learning from experience is part of life. Learning from other’s experience is much harder and less painful, but the lessons are there for the taking.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
Christopher A. Hopkins