Money management is not a new concept, but it seems that as we move further into the technological age of The 22nd Century, people have new ways to miss manage their money. Here is a list of the 10 most common mistakes people make with their money, how to avoid them, and most importantly why you should avoid them!
1. REFINANCING "SHORT TERM LOANS" INTO A HOME MORTGAGE. Don't refinance your house to pay off credit card debt(s), short term loans, or buy things that lose value instead of appreciating in value the way your house does. The biggest reason is that if something happens and one wage earner in a two income household, or the primary wage earner in a single income family loses their job, or gets sick or injured, you can lose your house to that oversized debt. Remember that credit cards and signature loans are usually short term loans, able to be paid off on their terms in a much shorter time frame then a mortgage. Even when you reduce the interest rate by half by refinancing your debts, you will pay much more in interest over the years of the mortgage then you would just paying of the smaller loan sooner. In some cases the interest may add up to a frightening 4 or 5 times the amount of money in interest of the original loan. Seek a different alternative if payments are piling up and making it difficult to stay caught up.
2. NOT INVESTING ANY OF YOUR MONEY REGULARLY. Better known as "Pay yourself first". It is a known but not practiced fact that you should set aside 10% of your monthly earnings for investing each and every month, just like it was a bill to be paid. Not doing so guarantees that you will always live paycheck to paycheck. Setting aside 10% for investing allows for a regular sum to begin to grow that can later be leveraged into working for you, while you can continue to work for the days when you CANNOT work anymore.
3. TURNING YOUR MONEY OVER TO AN "EXPERT" TO INVEST FOR YOU SUCH AS A MANAGED FUND, OR BROKER. This is a classic mistake people make thinking that they are making a smart decision on where to invest, but it is actual just a lazy way to try and invest and it is a very costly way. Charles Schwab, TD Waterhouse, Dean Witter and others provide for a discount brokerage fee for trading in almost every stock and fund imaginable. They and others also provide free education for beginning investors, including how to assess what kind of investor you are, and match the type of investment with your kind (usually based on your tolerance for risk). Relying on someone else's "advice" solely with no other basis than he is the broker assigned, is allowing someone to experiment with your money. If you are going to do that, the bare minimum requirement would be to see proof, that this individual was also invested in the program he recommended, so he quote, "practices what he preaches". Otherwise, take the time to study the different programs yourself, and leave your money in a simple money market account until you decide on a different investment.
4. INVESTING IN INCOME OPPORTUNITIES AND BUSINESSES FROM SEMINAR PRESENTATIONS, ESPECIALLY THOSE WITH "TODAY ONLY" PRICING SCHEMES These type of business or investment opportunities have been around since America was first being formed and in one form or another have consistently traveled and presented itself, changing style to appeal to the market at the time, but always with the same basic message, and appealing to the same public: the small investor who has big dreams! Whether it is a the latest spin on MLM (multi-level marketing), have you seen the latest Amway commercials, to a "new" product re-packaged and presented all new, the bottom line ends up, find out what you can afford, and finance your "dream" business for that amount. Then make sure that you subscribe to some service or product that requires a monthly outlay payment. The initial "investment" allows the company to recoup their seminar and pay the commissions on all those nice salesmen, while the monthly gives the company its residual income. You the customer may get something worthwhile, but usually you find out it is not what you paid for, doesn't work as described or intended, and could have been bought or gotten much cheaper. All legitimate opportunities should be able to be researched and references contacted, separate from the list of testimonials provided by the seller, and then a decision made as to whether to invest or not. If you miss it otherwise, then you probably should have anyway.
5. REMAINING AN EMPLOYEE ALL YOUR LIFE INSTEAD OF A BUSINESS OWNER. This is a basic fact of taxation and your ability to keep more of your money that you make legally. ALL families should have some form of a legitimate and legal business entity that allows for maximum use of tax deductions. As an employee your money is always taxed first before you even get it. But, as a business owner, your money is taxed AFTER expenses are paid. This is a huge difference allowing a business owner to pay expenses related to the business operation before assessing and paying taxes. As long as the deductions are legal and supported, they will all stand up to IRS audit. More about this later...
6. ADJUSTING YOUR LIFESTYLE TO MATCH ANY PAY OR SALARY INCREASE. Behaving this way is the classic "keep up with the Jones' " mentality. More disposable income should mean a greater investment in leveraging your future money. Diverting your money before you can get used to the higher paycheck, will greatly increase your future returns, and make more money available in retirement, maybe even accomplish early retirement. The whole idea is to use the time value of money to your advantage. Simply put, the longer your money is available to grow, the greater the final balance will be of the investment (given that an average rate of return is maintained for the life of the investment).
7. KEEPING YOUR MONEY IN A SAVINGS ACCOUNT AND NOT INVESTING IT. A
standard savings account today yields somewhere between 1% and 3% for the
bank to use your money. That lack of yield does not even keep up with
average inflation over a 10 year period, much less the current rapid
inflation that we are experiencing. You must locate investments based on
your comfort with risk that will give yields closer to 10% or even 20%. You
might say, "Colin, no way can I get 10% in today's market". But there are
investor programs, such as blue chip stock monthly deductions, commercial
loan investor groups (usually requiring a minimum $10,000 initial investment
but smaller additional increments can be added, plus the accrued interest
can be reinvested back into the principal), and some of the more stable
annuities offered through discount brokerages and life insurance companies
(be careful of loaded funds - those that have fees that must be deducted in
the first few years of the fund life. They eat up critical initial beginning
monies that are necessary to get the time value of money really going).
8. RENTING AND NOT BUYING. All of us at one time or another for one
reason or another have needed to rent our living spaces. This is not a bad
thing, and sometimes actually makes more sense than buying. But at some
point all of us need to convert over and buy our home. The reasons for this
are clear, and those that stayed away from the refinance craze and
speculation of houses are still doing quite well because their equity and
investment is still solidly in their homes. Nothing can replace the long
term benefits of owning your own home. From having a good tax deduction for
interest paid, to equity in the property you do not have when renting, to
control over most or all aspects of the property, buying just makes better
sense. So, how do you know when it is time to move up and buy? Here you go:
When your current rent meets the criteria needed to pay a mortgage
with the correct debt or income to debt ratio, i.e. 28% or less.
When your overall debt ratio is 42% preferably 38% of your
disposable income each month.
When you are established in a career field and location not subject
to transfer or relocation.
When you have requested your own credit report and find at least 3
active tradelines all in good payment standings (this is usually a
lender minimum standard for approval).
9. MAKING EXTRA HOUSE PAYMENTS FOR THE FULL AMOUNT LISTED ON THE
COUPON THINKING THAT THEY ARE PAYING THE HOUSE OFF SOONER. Making full extra
payments, such as doubling up payments or making extra annual payments does
pay the house off sooner, but at the SAME amount as you originally financed!
You do NOT achieve any savings by doing this because the actual payment
received by the lender is the actual amount owed long term, so they are
happy but your budget is not. The idea is to pay off early AND save on the
interest paid over time. To accomplish this most effectively, follow these
steps:
Pay you mortgage on time! Paying extra will only get eaten up in
late fees if you do not pay on time, so be prompt with your payments.
Pay the scheduled amount except for 1 to 2 payments per year.
Send in the amount of the principal applied listed on the payment
break down portion of the statement for the previous payment, or listed
for the next payment, and list it separate on the coupon as PRINCIPAL
APPLIED, OR APPLY TO PRINCIPAL. If you do not state this most mortgage
contracts allow the lender to apply excess funds to any fees owed, late
fees, interest, and a number of other "costs" that they can use to drain
the effect of this additional amount. They know ALL TOO WELL what effect
that extra amount you are paying is going to have on your total interest
paid, and they don't like it. Their profit is interest, so they want it
all.
By paying just one extra principal payment per year, especially in
the beginning years, you can pay off a 30 year fixed rate loan in just
over 17 years, and save nearly 40% of the total interest paid on the
mortgage! By sending in a the whole payment you pay off early but with
the SAME interest cost just faster.
Don't use one of the companies selling a bi-weekly program where
they hold your money in escrow and make your payments for you. You can
do the same thing by just depositing your money every 2 weeks into a
money market account to make the mortgage payments from and then accrue
the extra funds over the course of each 6 months to make the extra
principal payment that their program states can be made, but only once a
year. Why is that? Because their program ends up with the other money!
They are not doing that to be nice or do you a favor; it costs big money
to have someone pay your mortgage for you.
10. TRYING TO PAY OFF ALL DEBTS AT THE SAME TIME. I have counseled
customers on how to gain momentum over their bills countless times, and it
seems that all of us at one time or another get caught in the trap of trying
to pay off too much, and end up having no money to invest or even set aside
for emergencies. Here is the formula I teach customers to gain much needed
momentum over their debts and get debt free:
Pay off the SMALL debts FIRST! This seems counter intuitive, but it
works to gain much needed momentum to stay with your program and not
give up. Remember, bankruptcy takes longer then 10 years to get over the
damage, and it can effect more than just your credit score, i.e.
employment, checking accounts, etc...
Once each small debt is paid off, use the amount previously applied
to those debts, which is now free to spend since that debt is now gone,
to the next lowest debt. Applying these funds will accelerate its
payoff, and give your ego a boost!
Continue this process while paying the other debts at just over (by
maybe only $5 ) the minimum payments, gaining the increased available
payment income from each debt paid off and using to pay on the larger
debts, combined with the minimum payment amounts already being spent.
By following this process you will pay your debts off faster, feel
more in control of your debts, and gain much needed leverage and
momentum over your debt situation.
Remember that you can also call up credit card companies and ask for
an interest rate reduction for a period of time in order to catch your
bills up. Most companies would gladly rollback the interest in order to
keep you paying and get you back on time. Keep in mind that there is
only two ways that the credit card companies make money from your
balance: when you charge things and they can charge interest, and when
you pay for those balances. No matter what your balance is, if you don't
pay they lose big time! So don't be afraid to "partner" with them and
get some help, and then do your part and pay on time. They will gladly
accept you back to normal standing when you have things under better
control and begin using their card again.
Your ultimate goal should be to get ALL revolving credit type
accounts down below 50% and if possible maintain them under 30%. This
will render you best credit rating and save you the most on interest
payments, while still keeping active tradelines for a good credit score.
Don't get rid of old credit cards with higher interest rates for
newer ones. This process will only benefit you for a short time on the
payment side, but will hurt you for a long time on the credit score
side. Older accounts paid properly ALWAYS count higher for your score
than newer ones. Getting rid of that older account will cause your score
to drop, EVEN if you keep the balance low. Just pay the old one down so
the interest is not significant and keep that score up!
