June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
All of us experience financial challenges at one time or another: an unexpected problem with the car, a sudden illness or even a job loss. We work hard to make money come in, only to watch it go right back out. At times it seems like these financial issues are unavoidable. The truth is many start with an innocent financial mistake that spirals into a serious financial dilemma.
Below are five of the most common financial mistakes people make:
1. No Clear Financial Goals
There's an old saying, "If you don't know where you are going, you will never get there." This is especially true of financial goals. If you don't plan for your goals, you will never achieve them.
Here are some common financial goals:
- Retiring by a certain age.
- Sending your children to the college of their choice.
- Starting your own business.
Write your goal down and put it somewhere where you will see it often. Include as many details as you can when describing your goal. Your goal should meet all of the SMART criteria.
Why? Because it's hard to measure your progress when you're working toward goals that include words like "someday" or "enough." But when you say something like "I want to save $18,000 for the down payment on a house in three years" you'll always know how far you are from reaching your goal and what it will take to get there.
2. Not Budgeting
Do you ever wonder where the money goes? To find out, write down everything you buy for three months. Take a look at what you are spending your money on and see where you can cut without making huge sacrifices. Can you cut back on coffee, dining out, parking and gas? Can you find a cheaper cell phone or internet provider? Can you get a better deal on auto insurance? You may be surprised at what you are really spending your money on.
3. Having too much Debt
Many people these days are finding themselves strapped with a lot of "bad debt" from overusing credit cards. Paying that debt off can take a long time and cost a lot of money. For example, look at one of Duane Lee's credit cards below.
|Number of years to pay off if only making minimum payments...||15|
|Total amount paid to credit card company when paid off...||$4,202|
And that assumes nothing further is charged to the account! As a general rule, your total debt payments (e.g. mortgage, auto loans, student loans, credit cards) should be less than 35%-40% of your income. If your debt exceeds this amount, you should adjust your budget to increase payments to your creditors.
4. Not Being Aware of What's on Your Credit Report
Your credit report is the story of your credit history. It tells people how good you have been at paying your bills. A lot of people may be interested in looking at your credit score, including:
- Potential employers.
- Property owners who you may want to rent from.
- Mortgage lenders.
- Credit card companies.
Review your credit report at least annually. It's easy to dispute errors and you should do it as soon as you catch one. You can order a free copy of your credit report from each of the three credit reporting bureaus every 12 months. Reports can be ordered through www.annualcreditreport.com or by calling 877-322-8228.
5. Waiting Too Long to Plan for Retirement
Most Americans are woefully unprepared for retirement. Millions of Americans will have to work through all or part of their retirements because they have not saved enough. Do not be one of them.
- If you have a retirement plan at work, make sure you participate. If your employer matches a portion of your retirement plan contribution, contribute enough to get the employer match.
- You should also consider opening a Roth or Traditional IRA. With traditional IRAs or Roth IRAs, you do not pay taxes on any of your earnings while your money is invested in the account. Traditional IRA contributions may be tax-deductible, and distributions after age 59 1/2 are taxed as income. Roth IRA contributions are after-tax, and distributions after age 59 1/2 are tax-free. If you meet the eligibility requirements, you can contribute $5,500 for 2017 into an IRA if you are under age 50; $6,500 if you are age 50 and over. For more information about IRAs, refer to IRS Publication 590A or talk to a financial or tax professional.
The reason these mistakes are so common is because they are easy to make. By taking the time to educate yourself and making the right steps along the way, you can avoid these mistakes and save yourself a lot of time, money and heartache in the process.