Don’t Let These Money Mistakes Derail Your Future
Act now to avoid these 8 pitfalls that can damage your long-term financial situation—and start building a more secure tomorrow.
At any given time, you’re likely getting blitzed with information about credit cards, mortgages, retirement accounts and other factors that influence your fiscal health. It all may be coming at you so quickly that you overlook the many pitfalls that can hurt your long-term financial situation.
The smartest thing you can do is to take the time to evaluate what you’re doing and determine whether you need to take any corrective measures.
To maximize your money, you must avoid these 8 common financial mistakes that can put your future at risk:
1. Not having enough (or any) insurance.
Insurance acts as a huge safety net that protects everything you’ve worked hard for throughout your career. Considering the stakes, it’s smart to sit down with a professional who can help you match your individual situation with available plans.
“Life, disability and long-term care are vital components of a comprehensive financial strategy,” says financial planner Nick Ventura, president/CEO at Ewing, N.J.-based Ventura Wealth Management. “Having these elements in place will offset the risks of catastrophic events.”
NEA Member Benefits offers a range of life insurance options to help cover yourself and your family.
For example, NEA Complimentary Life Insurance provides eligible members with up to $1,000 of term life insurance, up to $5,000 of AD&D (accidental death and dismemberment) coverage, $50,000 of AD&D for covered accidents on the job and $150,000 of life insurance for unlawful homicide on the job. All you need to do is name your beneficiaries on your policy. Eligible new members also receive $15,000 of no-cost NEA Introductory Term Life Insurance for their first 12 months.
Beyond this free coverage, you and your spouse can supplement your life insurance at member-only rates on a wide range of plans, including NEA Group Term Life Insurance, NEA Level Premium Term Life Insurance and NEA Guaranteed Issue Life Insurance.
Watch this video to hear what other NEA members have to say about the importance of life insurance.
2. Not planning for life after you.
Most people don’t want to contemplate their own mortality, but putting off estate planning is ill-advised. It’s difficult enough to lose a loved one, so when he or she leaves behind a tangled financial mess, coping becomes more complicated.
In addition to arranging for an authenticated will, trust and other estate-planning options, you should designate beneficiaries for all of your retirement accounts. List each one by name (as opposed to “my spouse” or “my children”), with a Social Security number and a percentage allocation of what each beneficiary should receive, says Thomas J. Granger, assistant vice president/sales director of qualified plans for Security Benefit, which provides the NEA Retirement Program.
“You need to update this after every life event that would change circumstances, too,” Granger says. “This includes a marriage, birth of a child and/or a divorce. Judging from what we see here among our clients, I’d say that no less than 15 percent of our accounts either don’t have beneficiaries listed or aren’t properly updated. This results in court case after court case in which the intent of the deceased is contested.”
3. Being obsessed with paying off your home early.
It’s admirable to build as much equity into your house as possible, but don’t take this to extremes. Just like stocks, a home is an investment. It gains (or loses) value each year, based on its estimated sales value at any given time. True, housing prices surged by nearly 11 percent in 2013. However, during that same year, the S&P 500 delivered an astonishing 30 percent in returns—an amazing, perhaps once-in-a-decade performance for the overall stock market. In fact, the S&P averaged a nearly 16 percent gain since 2009 through the end of 2013.
What does that mean? Well, if you allocated your extra funds toward paying off your mortgage on an accelerated payment schedule for all of those years—as opposed to building up retirement-intended stock funds—then you missed out on some potentially big stock market earnings.
“While it can make homeowners feel better, paying off your mortgage early instead of investing for the long term can be a wrong move, especially with interest rates as low as they are,” says Paul Jacobs, a financial planner with Scarsdale, N.Y.-based Palisades Hudson Financial Group. “By borrowing at low rates and generating higher returns with your investments, you can make a nice profit.”
4. Not checking your credit report regularly.
Your credit rating translates directly into savings. The impact could amount to literally tens of thousands of dollars—if not more than $100,000—in avoided interest paid over your lifetime.
In addition, credit reports aren’t perfect. You’ll want to check yours regularly to quickly discover whether any errors have been made that could negatively affect your score.
“You should check your credit report at least every year,” says J. Douglas Wellington, an associate professor with the School of Business and Management at Bangor, Maine-based Husson University.
“You are entitled to a free credit report every 12 months,” he says. “Use a website such as annualcreditreport.com to check all three major credit bureaus. Also, some credit card companies are now displaying your credit score on your statement to allow you to monitor your score monthly.”
5. Not paying off your credit card balance every month.
You can condition yourself for sound budget discipline by making good on your entire credit-card obligation every month—to the very last penny. That way, you’ll negate those exorbitant interest rates (well over 15 percent for many variable-rate cards).
You’ll also be better equipped to resist the temptation of spending beyond your means, because you’ll realize how painful it is to write a check for a huge balance at the end of your monthly billing cycle.
“Credit cards should be a 30-day loan, at best,” says Jeff Motske, CEO of Huntington Beach, Calif.-based Trilogy Financial Services.
6. Not having an emergency fund.
Building up an emergency fund sounds pretty boring, but it’s absolutely critical. What if you get laid off? Or what if you encounter unanticipated major expenses that sap your monthly budget?
Recommendations on how much to save vary depending on individual situations. But the general rule of thumb is to always keep three to six months’ worth of living expenses in a no-risk savings account.
“Whether a new baby comes along or a job is lost or an unexpected home repair hits, you need this to avoid going into credit card debt,” Ventura says.
Get your emergency fund started now with one of our savings options—the NEA Online Savings Account, the NEA Money Market Account or the NEA Certificate of Deposit. As an added incentive, you’ll get a $20 exclusive bonus for each new account type you open each year.
7. Getting a late start on retirement saving.
Sure, putting off savings is understandable, especially if you’re saddled with massive college-loan debt. But many people jeopardize their retirement by delaying contributions for years.
Frankly, if you wait any longer than the moment you get a “real” job, you’re late to the party.
Why? Because the difference between saving just $2,000 of your annual pre-tax income in a retirement plan starting at age 22 as opposed to starting at age 27 is $91,867 over 40 years (assuming a 6 percent return compounded annually, without withdrawal and with reinvestment of investment income). The difference between a starting age of 22 versus 32 would be $160,515, according to projections from Security Benefit.
If you bump up your contributions to $4,000 a year, you could save a total of $656,272 if you start at age 22, compared with only $472,537 if you start at age 27—and a paltry $335,241 starting at age 32.
“You should sign up for your employer’s savings plan before you get your first paycheck,” Granger recommends.
“It’s common for employees to change their minds if they do so after getting that first check,” he says. “They see that they’re taking less home, and they think they’re losing money, even though the very opposite is true. When you take out your contribution before you see your first paycheck, there is no ‘adjustment shock’ to discourage you.”
Another essential step: Designate your contributions as a percentage of your income, not as a flat dollar figure.
“Teachers in particular need to know this,” Granger says. “403(b) plans typically take flat-dollar contributions, such as $50 or $100 every month. The danger is that you won’t make adjustments as your income rises. That’s why setting aside a percentage of overall income will usually result in higher savings over time.”
Granger recommends that educators increase their contributions each year to match any increases in their salary.
8. Borrowing from your retirement account.
Think of your retirement account as the ultimate “in case of emergency, break glass” asset. But you really never, ever want to break the glass!
“People often do this to buy depreciating assets, like a car,” Ventura says. “But it’s a bad idea. The immediate gratification of such a purchase isn’t worth putting your long-term goal of retirement at risk. Remember: You will not be able to borrow to pay for retirement.”
Build your financial future today
From saving for unexpected emergencies and building your retirement nest egg to insuring yourself and your family, NEA Member Benefits can help you create a more secure financial future. If you have any questions about our savings, retirement or life insurance policies, please contact us.
This article was published in NEAchieve!, our monthly e-newsletter. Sign up to receive helpful tips and information delivered to your email inbox.
Deposit products offered by Discover Bank, Member FDIC.
Choose from four savings programs to grow your nest egg.
Also in this issue
More popular articles from this edition of NEAchieve!