HED: 13 Financial Mistakes to Avoid in 2013
PROMO: Don't fall into these traps for the unwary.
by Dan Caplinger
The new year is upon us, and it's a great time to resolve to be better at managing your money in 2013 and beyond. With times as tough as they've been for millions of Americans, it's essential to stop financial mistakes from turning into massive money leaks that will wreak havoc on your budget.
To help you drill down on the biggest opportunities, here are 13 of the most common mistakes people make with their money.
1. Paying too much for checking.
Banks have done everything they can to recover their big losses from the financial crisis, and fee income has been front and center in their strategy. Between overdraft fees of $30 or more, ATM fees as high as $5, and myriad other nickel-and-dime charges, bank fees can turn into a massive cash drain. With many banks offering features like extensive ATM networks, ATM fee reimbursement, and low-cost overdraft protection, there's no need to spend a fortune just to have a checking account.
2. Carrying a credit-card balance.
The other way that banks make a fortune from customers is by encouraging you to carry a credit card balance. With most cards still charging double-digit interest rates, credit cards are a gold mine for banks, but they can put you into a debt hole that you'll fight to get out of for years. Be smart and do everything you can to get card balances paid down pronto.
3. Having a high-interest-rate mortgage.
If you own a home and haven't refinanced in the past couple of years, you may be paying hundreds or even thousands of dollars a month more than you have to. With rock-bottom mortgage rates near record lows, you can slash a big chunk off your payments or lock in a shorter-term mortgage to get your home paid off faster.
4. Keeping savings in zero-interest money market mutual funds.
Money-market mutual funds used to be a great place to put spare cash, but these days, they pay next to no interest and don't even come with FDIC insurance. With many FDIC-insured bank accounts offering nearly 1 percent on high-yield savings accounts, you won't get rich off the interest, but you will put yourself in a more secure position with your savings.
5. Not updating your insurance coverage.
Whether it's coverage for life, health, home, or auto, insurance can be hard to deal with. But if your coverage is out of date, you could be paying way too much for your insurance -- or even worse, not getting the protection you need if disaster strikes. Check out your policies and schedule a time with your agent to see if you can do better than what you have now.
6. Buying into bond funds.
On the investing front, many people have piled into bond funds because of their high recent returns. But with many Treasury bonds yielding less than 2 percent, you won't get much income for your trouble, and you could face big losses if interest rates don't continue to drop in the future. Right now, the risk-reward trade-off isn't in bonds' favor, so if you have a lot of them, look to trim your exposure.
7. Being too scared to invest in stocks.
Conversely, many investors have avoided stocks because of worries about the economy. Moreover, many people feel like the stock market is rigged against them, with memories of 2008's collapse still fresh in their mind. Yet the millions of investors who got out of the stock market four years ago have missed out on hundreds of billions of dollars of recoveries from those losses. Don't go out and bet everything on stocks now, but have a plan in place to get some exposure to stocks for your future.
8. Not setting money aside for retirement.
When times are tough, it's easy to ignore financial goals that are way in the future. But with companies cutting back on pensions and Social Security in danger of cuts, saving for your own retirement is more important than ever. Take advantage of the tax breaks that the IRS gives you to contribute to an IRA as well as your employer-sponsored 401(k) or other plan at work, and you can both save thousands off your taxes now and put yourself in better position to retire rich.
9. Paying big fees on mutual funds.
When it comes to investing, high costs are out of style. Yet you can still find mutual funds charging investors 5 percent or more in up-front fees just for access. With popular exchange-traded funds and other low-cost investment options so readily available, there's no reason to pay sales loads and other high-commission fees to invest. Every dollar you save in costs is another dollar in your pocket when you'll most need it down the road.
10. Not having a will and other estate-planning documents in place.
No one likes to think about their mortality, but having the right estate-planning documents can save your family a ton of trouble if something happens to you. A will, a health care power of attorney, and an advance directive to tell loved ones what kind of extraordinary medical care you want in order to keep you alive are crucial to help your family get through potential crisis situations.
11. Missing out on big discounts when you shop.
With the rise of Internet shopping, paying full price for just about anything has become a thing of the past. Before you buy, check out the many coupon sites like RetailMeNot to see if you can score a quick discount, or try to pick up a discounted gift card to your favorite store. Combined with traditional coupons as well as daily-deals websites like Groupon (GRPN), you'll find a host of ways to save some cash on the things you buy.
12. Ignoring your credit history and credit score.
Your credit history has a much bigger impact on your life than you think, affecting not just loan eligibility but also what you pay for insurance and even whether you'll land your next great job opportunity. Do a credit checkup today, but don't pay for the privilege; go to the government's annualcreditreport.com website for your free look at what the three big credit bureaus have on your record. Check it for mistakes, and if you see any, get in touch with the bureaus directly to find out how to fix it.
13. Using expensive ways to generate quick cash.
Finally, too many people use payday loans or cash advances on credit cards to get cash in an emergency. The better choice is to set aside an emergency fund with enough money to handle those unexpected situations before they come up. Having a nest egg squirreled away will save you a boatload of financial charges down the road.
Resolve to be smarter with your money
Avoiding these 13 financial mistakes is a smart first move toward getting your finances in order. Address them all, and you'll find yourself with a lot more money freed up to do the things you want.
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