Everyone makes mistakes with money. As financial advisors, we are often asked what top money mistakes we witness. While many might expect us to expand on investment or retirement saving mishaps, the top five mistakes we see have more to do with money management than anything else.
- Using a HELOC as a piggy bank. Home Equity Lines of Credit are a great resource. When clients approach retirement, I often advise them to attain a line of credit to be used for emergencies if they’ve paid off their home mortgage. It’s much easier to establish a credit line when you don’t need it than when you do. However, one of the biggest mistakes I see people make is using HELOCs just because they have access to the money. Often they don’t think about how they’re going to pay back the money they borrow once the payment balloons, especially if the interest rate increases. Lesson learned: Always exercise caution when using borrowed money.
- Not paying attention to your withholdings at work. I’ve seen many emergency funds depleted due to a nasty surprise come tax time. On the other hand, while some people like the idea of a tax refund at the end of the year, they should ask themselves if that money might be put to better use if received in smaller increments throughout the year than in one large lump sum at the end. Lesson learned: Consult a tax professional to make sure you’re withholding the correct amount with each paycheck.
- Keeping your mortgage for the tax deduction. I can’t tell you how many times I hear “I’d pay off my mortgage except for the tax deduction.” There are a lot of good reasons to keep a mortgage, but that’s not one of them. I find people don’t realize that they will only get back a portion of the interest paid, and not all of it. For example, if you’re in the 25 percent tax bracket, you will get back 25 percent of the interest you paid, not 100 percent. Lesson learned: Carry your mortgage because of a low interest rate and as a smart use of capital, not for a tax deduction.
- Not owning life insurance because you’re healthy. As with borrowing money, life insurance is the easiest and cheapest to acquire when you don’t need it. Remember that unforeseen circumstances can happen to anyone at any age, regardless of your health. Lesson learned: Even if you’re “young and healthy” be smart and save money; look into a life insurance policy sooner rather than later.
- Trying to do everything on your own. Trying to manage all of your finances when you’re a busy person is the equivalent of running a growing business and refusing to hire anyone to help. Will the business succeed in the long run? Probably not. Lesson learned: Every person’s situation is unique, so it’s best to consult with a financial advisor to make sure you are doing everything you can to accomplish your goals.
If you’re tired of trying to do everything on your own, schedule a complimentary meeting to see how we can help you!