7 nasty money habits to kick
To help you avoid being a repeat offender, here are 7 of the common money errors that many of us make repeatedly, along with the real-world cost of each and a better way to handle each situation.
* Spending without a budget.
* Carrying a balance on credit cards.
* Ignoring interest rates.
* Failing to see how little purchases add up.
* Paying everyone else, saving “what’s left.”
* Not managing your investments.
* Getting emotional about your investments.
Spending without a budget
Many times when people think of financial planning, they think only in terms of investments But if you have income and bills, you also need a budget. Too many times, “there is more outgoing than income,” he says.
The cost: Your financial peace of mind and the ability to plan long-term. People misstate what they think they are spending by every bit of 15% to 20%.
Instead: Keep track of what you spend to get an idea of where your money is going. The key is to account for those things that aren’t regular bills — groceries, entertainment etc.
And set a little aside for one-time emergencies, like car repairs, a broken washing machine. People tend to leave those kinds of expenses out of a budget because they tend to be one-offs. What people don’t realise, is that there are always one-time expenses.
Carrying a balance on credit cards
Interest rates can be 18% to 21% or more. People making minimum payments never get the thing paid off.
Another way to think of it: Treat yourself to a nice dinner, and 20 years from now you’ll still be paying for it. In general, carrying a balance on your cards is a terrible idea.
Instead: Pay balances in full each month. If you need to use a credit card to handle an emergency (medical bills and car repairs, not a quickie vacation), use it, then stop using credit until you have that bill paid.
Ignoring interest rates
Whether it’s your money market rate or what you could get on a mortgage re-financing loan, it pays to keep up with the current prices of borrowing and lending money.
The cost: Lost income if you could have been getting a higher rate of return on your account. Higher mortgage payments if you don’t take advantage of lower mortgage rates.
Instead: Stay abreast of the interest trends that impact your personal finances.
Failing to recognise how much little purchases add up
Small amounts, like small leaks, can really drain your wallet. Analyse everything from those nonessential snacks to out-of-network ATM charges to those extra phone plan minutes you’re not using.
The cost: If you’re like most people, this costs a good chunk of your paycheck.
Instead: Take the records of your cash purchases and lay them side-by-side with your debit and credit card statements to get a complete picture of where you’re spending The questions to ask is: “Where are you spending that money, and does it make sense?”
Paying everyone else then saving ‘whatever is left’
The cost: If all you’ve saved is scraps here and there, that’s what you’ll have at retirement.
Instead: Pay yourself first. Take at least 5% to 10% of your pay to max out your retirement plan, she says. After that, save outside the retirement plan.
Not managing your investments
You’re saving the money. But you also want to make sure your nest egg is diversified and that you have earning goals for various aspects of your portfolio. Everyone’s target is going to be different. The problem is that too many people aren’t making the attempt.
The cost: Balancing and managing your investments can mean the difference between a good year and a bad year.
Instead: Look at your holdings like the pieces of a puzzle. Why do you have various assets, and what purpose do they serve toward your goal? What are your goals for each asset, as well as your investments as a whole? Is your portfolio meeting those expectations?
Getting emotional about your investments
Two big mistakes: People fall in love with their investments and hang onto them “beyond the point where they should,” or, when the investment starts going down in value, “greed kicks in” and they want to hang on until it bounces back. Neither strategy is smart.
Instead: When it comes to timing the market, nobody can do it. The smart thing is to invest in a very diversified way. It isn’t sexy, but it works.