advertisement
Are you a smart money manager? Consider these questions:
Should you save cash for college in your child's bank account? Since you can deduct the interest, should you borrow against your home equity? Which should you do first: pay off debt or put money into savings?
Sometimes, a financial move you're making seems like a terrific idea -- and then you learn the hard way. Here are 10 moves to avoid:
1. Using the default fund-investment selection for automatic enrollment in your work retirement plan. It sounds like a shortcut, and that can be appealing when you have to fill out a mountain of paperwork before starting a job, says Wayne Bogosian, a co-author of "The Complete Idiot's Guide to 401(k) Plans."
Many times, that's not a smart money move. It's not uncommon for an employer to cap the default selection at a lower percentage of your salary than the employer would match. For example, the default might be just 3%, while the employer would match up to 6%. What that means: If you use the default setting, "you're leaving money on the table," Bogosian says.
In addition, the default fund often yields a lower rate of return, he says. "So if you leave your money in there for a long period of time, the value will erode," Bogosian says.
2. Buying merchandise on credit with a "same as cash" offer. "It sounds like a great money move, but if you screw it up, it could cost you hundreds," says Clark Grinde, a financial adviser in Story City, Iowa.
With many same-as-cash offers, if you don't pay by the final due date, you have to pay the balance, plus interest going back to when you first made the purchase, he says. Sometimes, the rates can go as high as 29%.
Too many things can go wrong. When the due date comes, perhaps you've had a financial emergency and don't have the cash. Or you forget. Or the date falls on a Saturday, and you pay it the following Monday. "You're out of luck," Grinde says.
More from Bankrate.com and MSN Money
3. Paying off low-interest debt at the expense of your savings. Try to think like a bank, Bogosian says. If you've got extra money and you're deciding between retiring a 4.5% loan and putting it into a retirement account that's bringing you 7% or more annually, ask yourself: What's the smarter move?
4. Not looking for the potential downside of each investment. Every investment has possible pitfalls, but if you understand the investment and the potential problems, you can determine if the vehicle is right for you. If anyone tells you something is perfect, that should be a red flag.
One point that might help in the analysis: Ask yourself what the money could be earning elsewhere. Thomas Posey, the president of Posey Capital Management in Houston, recalls a $100,000 investment vehicle that promised investors either their money back or their money back with interest.
But the risk wasn't simply the principal -- it was also about $27,000 in interest the investor could have made over the same term in a money-market mutual fund. "It's not a bad investment, but there is a downside," Posey says.
5. Borrowing from yourself. Think that loan from your 401(k) sounds like a good idea? You might want to give it a second thought.
"The true cost of the loan is the interest you didn't earn plus the administrative fees," Bogosian says. The cost of taking even $1,000 from your savings can be steep.
Plus, real life can change your plans. You're already in a bind, or else you wouldn't be borrowing from your retirement. So what if something else happens and you can't afford to contribute and make your loan payments? You'll end up losing that money and the compounded interest, too.
The secret of saving for retirement is putting away "a little bit as we go along," Bogosian says. "Start changing that strategy, and the consequences could be dire."
6. Taking out a home-equity loan. Too many times, consumers think a home-equity loan is a good thing because they get a tax deduction on the interest. "That bothers me a lot," financial adviser Grinde says. In the big picture, they are going into debt and draining off the equity in their homes. Because the home acts as collateral for the loan, if anything happens and they can't pay, they lose the house.
"A lot of times it's for a consolidation loan, and it's a cry for help," Grinde says.
7. Over-withholding. "Everybody knows it's not a smart thing to do," Bogosian says. "But it feels like a bonus."
Though some people tout it as a forced savings plan, the truth is that when the refund comes, few people put it into their savings, he says. Instead, it disappears into their checking accounts.
So, change your W-4 allowances so that you're paying the correct amount. Adjust your retirement contribution so that the money you would have gotten as a refund really does go into savings. You should still end up with a slightly larger paycheck because your retirement contribution is coming out of pretax dollars, Bogosian says.
8. Saving money in your child's name. This can hurt you in a couple of ways, Bogosian says. First, when it's time for college, it could reduce the amount of financial aid your child might be able to get. The financial-aid process "values assets in the child's name more than assets in the parents' name," Bogosian says.
The other problem: Once the child comes of age, he or she may decide to use your hard-earned cash to buy a sports car and get a cool apartment instead of a college education.
Look into a 529 account (in which money is saved for the child but belongs to the adult) or a Roth IRA (yours or your child's), which can be tapped without penalty for education, Bogosian says.
9. Opening store credit to get a one-time discount. In this case, setting out to save a couple of bucks could cost you thousands, Bogosian says. When you take out a new credit card, your credit score could drop. Lenders see that you have the potential to rack up more debt, and that means you could have trouble paying off a loan. That lower credit score could translate into a higher rate on your next long-term loan.
10. Keeping too much cash. It sounds like the ideal problem, right? But what it means is your money isn't out there making more money.
"You should have an emergency fund," says Bogosian, who recommends having up to six months of living expenses socked away for a rainy day. After that, you risk losing ground to inflation.
"Money is only as good as its ability to buy something," Bogosian says. "If you're getting 2% interest on your savings account and inflation is 3.5% a year, you're walking backward."
By Dana Dratch, Bankrate.com
Rate this Article
High
