Posted on 01/01/2008 5:10:50 AM PST by Kaslin
When most of us make resolutions for the new year, we phrase them as "things to do": "I'm going to lose 10 pounds this year," or "I'm going to join a gym (and actually go)." But I'm taking a slightly different tack with my slate of 2008 resolutions.
My list includes common mistakes people make when it comes to money - and when I say "people," I definitely include myself. Let's all resolve not to make these blunders in the new year. And make sure you get through the entire list: I've saved the most important point for last.
- Spending without a budget.
A surprisingly large number of folks don't really know where their money goes. A simple budget, income on one side and expenses on the other, will give you valuable insight into opportunities to cut spending as well as boost savings. - Keeping a balance on your credit card.
Here's one of the more costly personal finance mistakes: Maintain a balance on one or more of your credit cards. Credit card debt is notoriously expensive. According to Bankrate.com, the average standard credit card interest rate is 13.42 percent. If you can afford to pay it off today, do so. If you can't, pay more than the minimum and get that balance down to $0 as soon as possible. - Not having an emergency fund.
Remember what our parents taught us? "Save something for a rainy day." As old-fashioned as that sounds, it's a great idea for everyone to have something set aside for emergencies. A good figure is three to six months' worth of normal living expenses stashed in something very liquid and safe like a high-yield savings account. If you own a home, consider establishing a home equity line of credit; you may never need it, but if you do you'll be glad you have it. - Ignoring the necessity of estate planning.
Most people know this: If you have children, you really need to have a will. But many people wrongly assume that estate planning is the province of the very rich or the elderly. It's painful to acknowledge your mortality, but it's important to make some decisions about how your assets will be divided when you die.
Start thinking about your financial legacy - security for your spouse, education for your children, or donations to charitable causes. Get your wishes in writing with the help of a lawyer; if you are truly wealthy, enlist the professional advice of an estate planner.
- Having too little (or too much) insurance.
Insurance is a necessity of modern life, a way to hedge against risks: The potential catastrophic financial consequences of a major health issue, damage to your property, or loss of life. Most bankruptcies, for example, are caused by uninsured health problems.
Take a little time this year to make sure you've got your insurance bases covered. And make sure you're not overinsured. Some people are so afraid of risk that they buy too much coverage.
- Not investing, or not investing enough, for retirement.
Thanks to the widespread adoption of tax-advantaged 401(k) plans, more and more people are investing for the biggest financial challenge of all: a financially secure retirement. Still, too many people aren't saving enough. As I noted in an earlier column, one survey found that about 60 percent of people age 45 or older have less than $100,000 in retirement savings. If you run the numbers for what retirement costs and what you're likely to get from Social Security, that's nowhere near enough. If you have the means to do so, contribute the maximum to your 401(k) or IRA. c
the Bush Tax Cuts All Over Again Updated: 2:42 PM 12/31/07 Common blunders: Personal finance resolutions for 2008 By Carrie Schwab Pomerantz Tuesday, January 1, 2008
When most of us make resolutions for the new year, we phrase them as "things to do": "I'm going to lose 10 pounds this year," or "I'm going to join a gym (and actually go)." But I'm taking a slightly different tack with my slate of 2008 resolutions.
My list includes common mistakes people make when it comes to money - and when I say "people," I definitely include myself. Let's all resolve not to make these blunders in the new year. And make sure you get through the entire list: I've saved the most important point for last.
- Spending without a budget.
A surprisingly large number of folks don't really know where their money goes. A simple budget, income on one side and expenses on the other, will give you valuable insight into opportunities to cut spending as well as boost savings. - Keeping a balance on your credit card.
Here's one of the more costly personal finance mistakes: Maintain a balance on one or more of your credit cards. Credit card debt is notoriously expensive. According to Bankrate.com, the average standard credit card interest rate is 13.42 percent. If you can afford to pay it off today, do so. If you can't, pay more than the minimum and get that balance down to $0 as soon as possible. - Not having an emergency fund.
Remember what our parents taught us? "Save something for a rainy day." As old-fashioned as that sounds, it's a great idea for everyone to have something set aside for emergencies. A good figure is three to six months' worth of normal living expenses stashed in something very liquid and safe like a high-yield savings account. If you own a home, consider establishing a home equity line of credit; you may never need it, but if you do you'll be glad you have it. - Ignoring the necessity of estate planning.
Most people know this: If you have children, you really need to have a will. But many people wrongly assume that estate planning is the province of the very rich or the elderly. It's painful to acknowledge your mortality, but it's important to make some decisions about how your assets will be divided when you die.
Start thinking about your financial legacy - security for your spouse, education for your children, or donations to charitable causes. Get your wishes in writing with the help of a lawyer; if you are truly wealthy, enlist the professional advice of an estate planner.
- Having too little (or too much) insurance.
Insurance is a necessity of modern life, a way to hedge against risks: The potential catastrophic financial consequences of a major health issue, damage to your property, or loss of life. Most bankruptcies, for example, are caused by uninsured health problems.
Take a little time this year to make sure you've got your insurance bases covered. And make sure you're not overinsured. Some people are so afraid of risk that they buy too much coverage.
- Not investing, or not investing enough, for retirement.
Thanks to the widespread adoption of tax-advantaged 401(k) plans, more and more people are investing for the biggest financial challenge of all: a financially secure retirement. Still, too many people aren't saving enough. As I noted in an earlier column, one survey found that about 60 percent of people age 45 or older have less than $100,000 in retirement savings. If you run the numbers for what retirement costs and what you're likely to get from Social Security, that's nowhere near enough. If you have the means to do so, contribute the maximum to your 401(k) or IRA.
- Putting off tax planning.
Every December, it seems that every financial news source publishes an article on "trimming your tax bill." These are usually filled with good advice, but don't wait until December to devise tax strategies. Throughout the year, select appropriate investments for your taxable and tax-advantaged accounts. For example: In tax-advantaged retirement accounts, consider investments that have the potential to generate a lot of taxable income; however, in taxable accounts, shift the focus to long-term capital gains and/or qualified dividend income. Offset realized gains with losses. Consider tax-free investments if you live in a high-tax state. And if your situation is at all complicated, you might do well by getting customized advice from a tax professional.
- Not understanding risk.
This is critically important: Risk and reward go hand-in-hand. If you're too risk-averse, your portfolio may not grow enough to help you meet long-term goals. Take on too much risk, especially in the short-term, and you might suffer catastrophic losses. Last year, the equity markets were quite volatile, and most market watchers expect more of the same in 2008. But remember that the markets' ups and downs are inevitable. If you're investing for the long-term (a minimum of five years), you should be able to endure the swings. If you're investing for a goal in the next few years, the equity markets are probably not for you.
- Not having a plan.
A lot of people manage their money by the seat of their pants; however, at the end of the day, successful personal finance requires planning. Craft a budget and use it to make decisions about spending and saving. Articulate your financial goals - calculate amounts and time horizons for college for the kids and retirement - so you can make appropriate investment choices. Plan your financial future to help you devise strategies for getting there.
- Letting emotions govern financial decisions.
Finally, I can't say this too forcefully: Try to remove emotion from your personal financial decision-making. Emotions are your enemy. They can cause you to buy at a market peak and sell at a market low, which is exactly the opposite of what you should do. If you can't make financial decisions objectively, consider working with an objective adviser who can help you avoid rash moves. I wish everyone the best - financially and personally - in 2008!
As chief strategist/consumer education for Charles Schwab & Co. Inc., Schwab Pomerantz is a leading advocate for individual investors. She speaks and writes extensively about personal finance issues and is a driving force in the movement to improve financial literacy in America. As president of the Charles Schwab Foundation, she also oversees the company’s philanthropic strategy and resources. Common blunders: Personal finance resolutions for 2008 By Carrie Schwab Pomerantz Tuesday, January 1, 2008 Send an email to Carrie Schwab Pomerantz Email It Print It Take Action Read Article & Comments (3) Trackbacks Post Your Comments 1 2 | Full Article & Comments | < Previous
- Putting off tax planning.
Every December, it seems that every financial news source publishes an article on "trimming your tax bill." These are usually filled with good advice, but don't wait until December to devise tax strategies. Throughout the year, select appropriate investments for your taxable and tax-advantaged accounts. For example: In tax-advantaged retirement accounts, consider investments that have the potential to generate a lot of taxable income; however, in taxable accounts, shift the focus to long-term capital gains and/or qualified dividend income. Offset realized gains with losses. Consider tax-free investments if you live in a high-tax state. And if your situation is at all complicated, you might do well by getting customized advice from a tax professional.
This is critically important: Risk and reward go hand-in-hand. If you're too risk-averse, your portfolio may not grow enough to help you meet long-term goals. Take on too much risk, especially in the short-term, and you might suffer catastrophic losses. Last year, the equity markets were quite volatile, and most market watchers expect more of the same in 2008. But remember that the markets' ups and downs are inevitable. If you're investing for the long-term (a minimum of five years), you should be able to endure the swings. If you're investing for a goal in the next few years, the equity markets are probably not for you.
- Not having a plan.
A lot of people manage their money by the seat of their pants; however, at the end of the day, successful personal finance requires planning. Craft a budget and use it to make decisions about spending and saving. Articulate your financial goals - calculate amounts and time horizons for college for the kids and retirement - so you can make appropriate investment choices. Plan your financial future to help you devise strategies for getting there.
- Letting emotions govern financial decisions.
Finally, I can't say this too forcefully: Try to remove emotion from your personal financial decision-making. Emotions are your enemy. They can cause you to buy at a market peak and sell at a market low, which is exactly the opposite of what you should do. If you can't make financial decisions objectively, consider working with an objective adviser who can help you avoid rash moves. I wish everyone the best - financially and personally - in 2008!
Very good list. But he doesn’t mention two of the top financial pitfalls: credit cards and buying cars on credit.
I suggest finding Dave Ramsey on the radio & listening. He hits everything on this list & more. Sound advice.
Wow, an entire article that is torn from the pages of DAVE RAMSEY’s Book.
Beat me to the post!
Nothing wrong with using credit cards as long as you pay them off. I always pay at least 3 times the minimum payment due, plus I ad the interest charge to it
Carrying no balance month to month is a huge savings. Personally I never buy with a credit card what I cannot pay for in cash. Then when the bill shows up I pay in full taking full advantage of the 30 day, or sometimes more, float which allows me to leave my money invested for the maximum term.
I have no other choice, but whenever I can I find a store when I need something I don’t have the cash for, that has no finance charges for two years, like Lowes. A few moth ago my water heater went out. So I went to Lowes and after I found one to replace the old one. I asked if they had a no finance charge for it, and they did. I immediately started to make a payment the following month and by the time I have it paid off there will be no finance charges, so it’s just like I paid cash for it
Or, you could visit:
www.daveramsey.com
Oh, I always wait before I buy anything else on my cards, until they are paid off
my resolution is to buy low, sell high
Just recently I bought three major appliances at a 25% discount AND 18 months zero interest financing.
I buy everything on credit and pay it off every month. It is a good way to keep track of purchases but I mostly use it for the protection the card services provide. If you buy an item or service that does not deliver, the card company goes after the seller. Invaluable!!!
Also, I use only my Amazon card and love the free rewards at Amazon.com!
My one issue with David Ramsey is his focus on having people pay off their mortgages. For many people this bit of financial advice makes absolutely no sense at all, and under the right conditions is often makes a lot of sense for someone to carry the largest mortgage they can afford.
Please tell me why it makes sense to pay the bank thousands of dollars in interest on a mortgage. Dave Ramsey calls that a “stupid tax.”
We graduated from Financial Peace University five years ago and almost have the mortgage beat now. We just went through Christmas with nothing but debit cards. Now it is the beginning of a new year and we are starting it with money in the bank, no credit card debt, and no bills except the normal utility bills and occasional medical bill. At a time of my choosing I can retire and live happily ever after, laughing all the way to the bank each and every month.
“common mistakes people make when it comes to money”
Not having enough...
My one issue with David Ramsey is his focus on having people pay off their mortgages. For many people this bit of financial advice makes absolutely no sense at all, and under the right conditions is often makes a lot of sense for someone to carry the largest mortgage they can afford.Please tell me why it makes sense to pay the bank thousands of dollars in interest on a mortgage. Dave Ramsey calls that a “stupid tax.”13 posted on 01/01/2008 10:37:57 AM EST by Alberta's Child
If you are going to have debt, mortgage debt is likely to be the cheapest form of debt. But if you are choosing whether to invest in a bond or savings account, on the one hand, or to pay off your mortgage on the other hand, I would vote for the latter. Why complicate your finances?
I agree, the protection you get when buying on a credit card is invaluable. I have gotten help many times this way.
Good advice. Another, possibly related, idea:Make your large charitable contributions in the form of appreciated stock.If you bought $1000 in a stock which doubled, and another $1000 in a stock that went bust, if you sold them both you would be even for the year, before taxes or after taxes. But if you were going to donate $2000 to your church anyway, donate the appreciated stock and declare the market value at the time you donated it as an itemized charitable contribution. Notice that the price you paid for the stock, and the fact that it appreciated since you bought it, doesn't matter in the tax consequences of the donation.
So now you have the same $2000 deduction as if you had donated cash, but you have avoided any capital gain realization and therefore any capital gain tax (you could in principle use the $2000 cash you would have donated to buy more of the stock you gave away - and have a higher cost basis for the same amount of stock).
Here's a perfect case in point . . . it's based on an actual business plan that I developed for my company where the property in question is a commercial building, but many of the same considerations apply for a conventional mortgage on a home.
1. The Client owns and occupies a $400,000 building with no mortgage on it. The Client uses the building to run a successful business.
2. The Client has no real assets other than the building itself and the value of the company.
I developed a series of recommendations for them, and my #1 recommendation -- aside from other things related to their actual business -- was for them to immediately take out a $250,000 mortgage on the building. The rationale for this was actually quite simple:
A. The company was able to secure a mortgage on the building with a 25-year amortization, paying a fixed rate of 5.75% for the first five years. The payment on this loan was about $1,575 per month. Over the course of the year, this came to around $19,000 in mortgage payments, of which $14,250 was a tax-deductible interest expense. In a 35% corporate tax bracket, the $14,250 in interest effectively "cost" the company about $9,300.
B. The company's cash flow was sufficient to cover the mortgage payments without any difficulty.
C. The company could immediately turn around and invest the $250,000 in highly-rated fixed-income securities paying a return of around 4.50%. So the company earned about $11,250 on this $250,000 in cash. As long as they paid out the $11,250 to cover other business expenses, there was no corporate tax paid on it.
So you can see that even in a simple case like this a person or business can use the tax laws to their advantage by borrowing money they don't really "need." Keep in mind that if you use the $250,000 for certain types of investments (like another building, in the case of the company I was dealing with), you may even be able to take advantage of tax write-offs for asset depreciation that wouldn't be available for your primary residence.
I am from Missouri (not really), but please show me how a home owner benefits, not a business.
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