Posted by Tim Stobbs on July 28, 2008
This is a guest post from Todd who blogs over at Harvesting Dollars. Todd writes on personal finance topics including behavioral finance, retirement planning, goal achievement, frugal living, and wealth building strategies. If you like what you read please subscribe to HarvestingDollars.
Avoid 6 Common Financial Mistakes
There are some things that drive me crazy (o.k., a lot of things really), and one of them is making a mistake that could have easily been avoided.
Earlier this year I finished our taxes for 2007, and boy did I find a stupid mistake. Not in my tax preparations, but in my actions in 2007. My wife and I sold some mutual fund shares to use as a down payment on our home, and I apparently sold the shares after owning them for 363 days. 2 more days I would have been able to pay long-term capital gains tax! Hear that whoosh sound? That’s the sound of me flushing free money down the toilet!
In an effort to clarify my own thoughts and help you avoid some of my dumb mistakes, here a list of bad financial decisions in most cases:
1. Using a checking account that doesn’t pay interest. Checking accounts are virtually a commodity, so why have one that costs you money (in fees or in lost interest)? Check out http://www.bankrate.com/brm/rate/chk_sav_home.asp to start your search for a new checking or savings account. (Editor’s Note: I wish we had these in Canada)
2. Keeping your emergency fund in an interest bearing account that is well below average. Now I’m not advocating switching banks or investment companies based on a 0.1% different in the APY, but you can switch companies very easily, all online today. Seriously. You could move your emergency fund to a different bank in about 5 minutes, all online, once you’ve identified a new bank. Go ahead and do it. I’ll wait….. People spend weeks and months shopping for clothes, cars, household appliances, etc, and yet just leave their $5,000 emergency fund earning 1% somewhere. Move it to a bank that pays 4% and you’d have $150 extra “free” dollars to spend on those clothes, cars, etc!
3. Cashing out your 401k, 403b, or RRSP when changing jobs. Or worse, accidentially having the funds sent to you in your name and missing the deadline to roll the funds over into an IRA. With taxes and penalties you’ll be losing 30-40% of your money.
4. Buying life insurance if you have no dependants, or buying life insurance on children. The primary purpose of life insurance is to provide for your family if you were to pass away. I’m very risk averse and I understand wanting to be “covered” by insurance for some items. The only reason I could see for insurance in this situation would be to pay of debt to family (something you’re hopefully working to pay off already) and to cover any final expenses. And hopefully your emergency fund and/or assets would be able to cover all of those items.
5. Buying “load” mutual funds. Paying commissions on mutual fund purchases does not improve your total return, and typically reduces your total return (because the cost of owning the fund increases). Although I do believe getting professional investment can be worth the cost, I personally would recommend finding a fee-only financial advisor so that you can be sure you’re receiving objective advice. If you’re just starting out and don’t have the funds for a fee-only financial advisor, there are plenty of books, blogs, and other online resources you can use to get started.
6. Co-signing for a loan. I’m sure your brother-in-law is a wonderful guy, but consider this: bankers are paid to make a certain number of loan each month. If a banker’s not willing to loan money to your friend or family member, should you? Would you agree to provide life insurance for someone if every life insurance company turned them down? There are other ways you can help your friend without co-signing, like offering to help them get their finances in order so that they can qualify for a loan (or better yet save up for the purchase!).
As I continue to make mistake and (hopefully) learn from them I will undoubtedly get all raged up again. When I do perhaps I’ll probably work on a follow-up article.