Seven Financial Mistakes to Avoid
This article is based on a piece by Bob Niedt that was featured in Kiplinger’s of April, 2016.
It’s safe to say that all of us, at some point in our lives, have made a financial blunder that we came to severely regret. For most of us, including myself, there is a plurality of unforced errors. Here are 7 all-too-common mistakes that we hope you will avoid.
- Borrowing from your 401(k)
“Hey, it’s my money anyway.” This is the common refrain heard when someone wants to take out a loan from their 401(k). There are several problems with doing this. First, you are denied the potential investment gains that would have resulted from leaving the balance intact. Second, you are likely to reduce or suspend new contributions while paying off the loan, thereby missing out on a potential employer match. Third, the interest on the loan is paid with after-tax dollars, and you will be taxed again on those dollars when they are withdrawn in retirement. Lastly, if you terminate, the loan must be paid back within 60 days or it will be considered a distribution and taxed as income. Ouch!
- Claiming Social Security early
Assuming you are in good health, it often makes sense to delay taking Social until age 70. Each year of delay boosts the payment level by about 8%, which is absolutely excellent for a guaranteed return in today’s ridiculously low interest rate environment. The key to accomplishing this is having the ability to live off your portfolio during those non-working years.
- Carrying credit card debt
For many people (too many people!), paying off credit card debt is the single-most profitable investment they can make. According to bankrate.com, the current average credit card interest rate is about 16%. Getting rid of a debt that charges usurious interest (not to mention all the late payment fees) is the single biggest financial favor you can do for yourself.
- Delaying saving for retirement
Albert Einstein once described compound interest as “the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” The key to getting compound interest to work for you is maximizing the time available for it. If your investments earn 7% per year, then every extra decade is an extra doubling of your money. To reach $1 million by age 65, you would need to save $381 a month if you start at age 25. If, however, you chose to wait until age 45, the amount would be $1,920. Please note that if you are above age 50, you are allowed to make catch-up contributions to your IRA or 401(k). However, these catch-up contributions will not be nearly enough to compensate for having a late start.
- Spoiling the kids and grandkids
Talk about a bottomless pit! Need we say more? Seriously, one of the best things you can do for them is to establish a 529 Plan through a state that offers low-cost fund options.
- Avoiding stocks
While some investors have more stock exposure than is warranted (especially with highly volatile individual stocks), others avoid stocks altogether because they got burned in one (or both) of the two major crashes that have occurred in this century. The inarguable fact of the matter is that to have any chance of staying ahead of inflation (which cuts the purchasing power of a dollar in half every 20-30 years), investors must have at least a partial exposure to equities (stocks). For most investors, the best way to achieve this is through low-cost, passively managed funds.
- Not getting professional advice when you need it
We saved this one for last, as it is often at the root of the other six financial mistakes.