10 nasty money habits to kick

By Bankrate.com

Remember the movie "Groundhog Day," the one where Bill Murray kept reliving the same day? Some people live their financial lives like that, making the same mistakes over and over.

But you don't have to be one of them.

To help you avoid being a repeat offender, here are 10 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.

• Not investigating disability insurance.

• Failing to see how little purchases add up.

• Not matching employer's contribution to retirement.

• Waiting until the last minute to fund IRA.

• 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, says John K. Ritter, CFP, co-owner of Ritter Daniher Financial Advisory in Cincinnati. But if you have income and bills, you also need a budget. Too many times, "there is more outgo than income," he says.

The cost: Your financial peace of mind and the ability to plan long-term. "Easily, I would think people misstate what they think they are spending by every bit of 15% to 20%," says Ritter.

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 dollars," he says.

And set a little aside for one-time emergencies, like car repairs, a broken washing machine or a trip to the emergency room. People tend to leave those kinds of expenses out of a budget because they tend to be one-offs. "What they don't tag is that there are always one-time expenses," says Ritter.

Carrying a balance on credit cards

Interest rates can be 18% to 21% or more, says Annette Simon, CFP, principal with Mosaic Wealth Management in Bethesda, Md. "People making minimum payments never get the thing paid off," she says.

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," she says.

The cost: If you have a $5,000 balance on a card with an 18% annual percentage rate, or APR, it will take 26 years to pay if you just make the minimums. Including interest, you'll end up shelling out more than $12,000. (And that's assuming you never use it again, make every payment on time and don't incur any fees.)

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 refinancing loan, it pays to keep up with the current prices of borrowing and lending money, says Beth Gamel, CPA/PFS, an executive vice president with Pillar Financial Advisors in Waltham, Mass.

The cost: Lost income if you could have been getting a higher rate of return on your CDs or money market 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.

Not investigating disability insurance

"Anyone earning an income and supporting themselves needs disability insurance," says Simon. More than 20 million people sustained disabling injuries in 2002, according to the National Safety Council.

The cost: If something keeps you out of work for a few weeks or months, disability insurance could mean the difference between cutting back on a few expenses while you get back on your feet or moving in with family or friends.

Instead: Coverage can be expensive, so find out if your employer offers any kind of plan. If not, do you have the savings to support yourself for a couple of months if you couldn't work? If the answer is no, shop around, and see if you can find a policy in your price range.

Failing to recognize how much little purchases add up

Small amounts, like small leaks, can really drain your wallet. Analyze 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, says Jill Hollander, CFP, president of Financial Connections Group Inc. in Berkeley, Calif. The questions to ask, she says, is: "Where are you spending that money, and does it make sense?"

Not taking advantage of an employer match for retirement funds

One of the biggest mistakes that lots and lots of people make, especially young people, is not investing in their employer's retirement plan at least up to the point where they get the employer's match," says Simon. "By not doing that they're leaving additional income on the table."

The cost: An additional 3% to 5% of your salary annually. Plus a few decades of compounding interest.

Instead: Figure out how much you can afford to contribute, and have the money taken out of your check.

Waiting until the last minute to fund your IRA

"A lot of people wait until April instead of setting aside throughout the year, then they don't have the money," says Hollander.

The cost: A more comfortable retirement. Contributing $4,000 annually to a Roth IRA (and estimating a 5% return) will result in roughly $89,000 in 15 years. With the same terms, $1,000 a year leaves you with a little more than $22,000.

Instead: Put away a certain amount regularly until you hit the contribution limit, Hollander says. "We have clients who put away $500 a month until they reach the maximum," she says.

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, say Hollander. Take at least 5% to 10% of your check to max out your retirement plan, she says. After that, save outside the retirement plan. Unless you're starting young, "the reality is that just saving in a 401(k) today is not going to potentially be enough money to retire on," says Hollander.

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," says Ritter. 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, Ritter says. He recalls reading one study of mutual fund investors who focused solely on blue chip investments and saw a 2.5% return on their money in 2005, while those who were more diversified earned almost 6%. Add in compounding interest year after year and that gives you an idea of the real cost, he says.

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, says Simon. Neither strategy is smart.

The cost: "In a down market, like 2000 to 2002, people lost a lot," says Simon. "It wasn't unusual for people to come in and their portfolios were down 50% to 80%."

Instead: When it comes to timing the market, "nobody can do it," she says. "The smart thing is to invest in a very diversified way. It isn't sexy, but it works."

By Dana Dratch, Bankrate.com