Guest Post: Six Common Financial Mistakes

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.

7 thoughts on “Guest Post: Six Common Financial Mistakes”

  1. I disagree with the recommendation to not buy life insurance on your kids. I believe that you should have around 1 years salary + funeral expenses on your kids so that in case they do die you will be able to have options of a nice funeral and taking some time off work to ‘regroup’.

    I’m not talking 500K like a parent would have, but I wouldn’t think 50K is out of the question.

    My reasoning is that no one can tell what the death of a loved one will do to a person. Maybe you want to take 3 months off of work and rent a cabin in the woods for some thinking time on what to do with your life . . . If you have no money since you just used your emergency fund for a funeral then you’re stuck returning to work in rough shape and your performance will probably suffer. People will be understanding, but if your performance is hurting your company they won’t let you drag them down. That could destroy a family.

  2. A financial mistake not on the list but one of many that could be added to the list is – when trading stocks, do not hang on to losers expecting that they will bounce back. You should have a stop loss for your account depending on the pain you can live with – 15% is a good stop loss figure.

  3. #3 doesn’t make sense for us Canadians. Even if you join your employer’s group RRSP plan, the money stays as RRSP under your name even as you switch jobs.

  4. I’m sorry to say that #3 I have made that mistake twice. The 1st. was in 1988 when I cashed out $10,000 of Pepsico (PEP) and the 2nd. was in 1994 when I cahed out $6,000 at my job at that time.
    Going back to my first cash out in 1988 and doing the math for dividend reinvestment & stock splits was enough for me to start my own web site of companies that offer Direct Stock Putchase Plans (DSPP).
    At this time I have listed for free 180 companies that offer DSPP the people can get into. Some of the companies even pay your fees.
    Come visit at http://www.aplussrc.com the younger you are the more time your money will have to work for you.

  5. High interest checking account sounds good, but there are so many other factors to consider when choosing bank. Personally i almost never keep much money on my checking account, but i guess every penny counts.
    -p

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