7 big money mistakes to avoid

7 big money mistakes to avoid








I’m going to guess you’ve made a financial
mistake or two in your life. Who hasn’t? For some of us, it was
more than an occasional late fee or random urge to overspend that
brought us to our financial knees. But I’m not talking about the
kind of blunders that got us into trouble—we could list those in
our sleep. Instead, I want to focus on the mistakes people make
while they’re working their way back to financial health. Whether
you’re recovering from a season of unemployment or from a financial
mess you created on your own, avoid these goofs and you’ll get
where you want to go much faster.
1. Not Saving


7 Big Money Mistakes to Avoid



You’ve heard this plenty, and here it comes again: Jump to the
front of the line— ahead of your creditors—when you divvy up your
paycheck. Get over feeling guilty about keeping money for yourself.
You need a fat emergency fund, and the only way to
build it is to pay yourself first! Stuff happens, and if you’re not
financially prepared for those emergencies, you’ll keep falling
back into
debt.
You’ll need enough in your fund to pay all your bills for at
least six months. But don’t let that big number discourage you.
Start by
saving enough to live on for two weeks, then up it to one
month, and so on until you reach goal.
Solution: Put your savings on autopilot—you
won’t miss what you don’t see. Commit to saving 10 percent of every

paycheck. If you can’t start there, start with 2 percent. Then
in a few weeks, change it to 5 percent, then 7 and so forth until
you reach at least 10 percent.
2. Paying for College
If you must make a choice between adequately funding your own
retirement and paying for your kids’ college education, put
retirement first. Contributing to college funds, going into
debt by cosigning for student loans or taking out a home equity
loan to cover tuition before you’ve taken care of your own future
are huge blunders. The best gift you can give your kids is to make
sure you won’t become a financial burden to them in your sunset
years.
Solution: Kids have far more options for
funding their college education than you have for your retirement.
They’ve got scholarships, grants, financial aid, student loans,
work-study programs and the not-to-be-forgotten method of working
their way through
college. Once your own future is secure and you’re out of debt,
that’s when you’re in a position to help pay for education. Use the
free Retirement Calculator at MoneyCentral.MSN.com/Retire/Planner.aspx to determine
how much you need to be setting aside for retirement each
month.
3. Too Much House
Add up your shelter costs (monthly mortgage payment plus taxes and
insurance). Your total shouldn’t exceed 28 to 33 percent of your
gross
income—and that’s only if you don’t have a lot of other debt.
Biting off more house than you can chew leaves you wide open to
foreclosure and bankruptcy.
Solution: Don’t let a commissioned professional
talk you into buying the most house you can qualify for.
Do your own research and run your own numbers to determine how much
house you can afford. You need a 20 percent down payment
and a 30-year fixed-rate loan, with monthly payments that can
easily fit within 28 to 33 percent of your current gross household
income. If you’re over your head in a house you can’t afford, maybe
it’s time to sell. If you’ve fallen behind or fear you may soon,
but you owe more than the house is currently worth, call your
lender immediately. You may be able to enter into a short sale (the
lender agrees to settle your debt for the sale price that you can
get for the house now, and forgives the balance you owe). Or speak
with a HUD-approved housing counselor to find out about other
options, such as loan modification (the lender agrees to adjust the
terms of your loan so you can afford to keep living in your
home).
4. Refinancing a Fixed-Rate Mortgage
With mortgage rates at a 50- year low, it’s tempting to refinance
to get a
lower monthly payment. But before you do that, ask yourself
this: Can you take the difference between the payment you have now
and the lower payment and use it to repay all your
refinancing costs within 24 months?
Let’s do the math. The average closing cost is 2.5 to 5 percent
on a $150,000 loan ($3,750 to $7,500), but the percentage normally
goes down as the loan increases. Divide the amount you’ll save each
month into the closing cost. If the result is more than 24, you’ll
be making a big
mistake by refinancing.
Even worse, refinancing with this lower monthly payment will
“reset the clock,” putting you back on a 30- year payback
schedule. Your goal should be to pay off the home so you own it
free and clear before you retire If you’re 10 years from paying off
your home and you refinance to get a lower monthly payment— but end
up with a new 30-year term—you’ll be making those new “lower”
payments for an additional 20 years! If the payment is, say,
$2,000, you’ll end up paying an additional $480,000 just because
you refinanced and reset the clock.
Solution: If you did the math earlier and it
worked out in your favor, go ahead and refinance—but keep making
the original, larger mortgage payments you’ve been making all
along. Now, that lower payment will make an authentic, financially
wise difference. You’ve managed to outsmart that reset
clock and the extra interest that comes with it.
5. Paying Off the Mortgage Too Soon
Paying extra on your mortgage each month is laudable, but not if
you time it badly. Your mortgage should be the last debt
you pay off. Why? First, its interest rate is a lot lower than the
interest you’re paying on your other debts (credit cards, student
loans). Second, mortgage interest on your primary residence is
tax-deductible. While you’re in debt having that deduction helps to
ease the pain by lowering your tax
bill.
Solution: Once you’ve built up a fat emergency
fund and all of your high-interest, unsecured debts are paid in
full—only then should you consider putting money toward paying off
your mortgage.
6. Investing in the Wrong Thing
If there’s one thing we’ve learned over the past year, it’s that
money invested in the stock market is at risk. You could lose it!
Don’t jeopardize any of your hard-earned money while you’re
carrying high-interest, unsecured debt. Instead, invest in your
debt—it’s a much smarter move. Let me explain: If you have a $2,000
credit card balance at 14.5 percent interest, you’re paying $290
per year in interest, or $24.16 per month. Instead of taking a
$2,000 gamble on the stock market, put it toward reducing your
credit card debt Now each month, rather than paying that $24.16
interest to the
credit card company, you get to keep it.
Solution: As long as you’re carrying unsecured
debt, do everything you can to pay it down each month. You’ll get a
return equal to the amount of interest you would have paid to the
credit card
company.
7. Debt Consolidation
Sounds great, doesn’t it? Get a new low-interest loan to pay off
all your high-interest debts! But more often than not, that’s a big
faux pas. Low-rate consolidation loans are typically tied
to something of value like your home’s equity. Bad enough, but
here’s the real problem: The financially immature person gets that
equity loan and then keeps using those credit cards. In no time,
the balances creep back to the limit. And that means double the

trouble.
Solution: Forget about consolidating old debt
into new debt. Instead, get serious about cutting your
spending so you can pay off the debts you have as quickly as
possible. If you have a good payment history, call the creditor and
ask for a lower interest rate. You never know— you just might get
it!
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Related: saving, money saving tips, money, finance, credit

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