Hugh F. Doherty, DDS, CFP

Many Americans are still struggling with basic money management. Most people do not have an emergency fund, 42% are uncomfortable with the amount of debt they have, and 1/3 don't have enough of a handle on their cash flow to spend less than they make each month. We've noticed some common mistakes among people of all income levels that could be hurting their ability to manage their day-to-day finances and save for their longer term goals. Here are 10:

1. Getting a big tax refund each year.

This is a sign that you may be having too much tax withheld from your paychecks. If this is the only way you're able to save, it's certainly better than nothing. The problem is that it's not exactly the most efficient way to save. Not only are you losing the ability to earn anything on that interest-free loan to Uncle Sam, but you also lose access to that money in the event of an emergency. 

2. Having only a rough idea in your head of where your money goes.

When I ask someone how much they're spending, they usually list a few bills and other expenses off the top of their head. But once they actually start going through their bank and credit card bills, they're almost always surprised to see where their money is really going. For this reason, you'll want to do the same thing. One option is to go through at least 3 months worth of previous statements and record your expenses by category on an Excel worksheet. Another method is to use a site like Mint.com to track your spending online for free. Both sites also have Apple and Android apps to help you manage your money on the go. 

3. Forgetting those non-monthly expenses.

Some of the largest sources of credit card debt are holidays and vacations. You can easily turn them into monthly expenses by dividing the amount you typically spend each year by 12. You can then have those monthly amounts automatically set aside each month so the money will be there when you need it. While you won't earn a whole lot at today's interest rates, it still beats paying interest on credit card debt.

4. Spending more than you really need to.

Once you know how much you're spending and where your money is really going, think of ways to reduce some of those expenses. Do you have subscriptions or memberships that you don't really use? Have you comparison shopped for things like insurance policies, mortgages, cell phone plans, and groceries? Are the purchases you're making for something you really need or just a status symbol? Can you think of lower cost ways of achieving the same result like bringing your own lunch and coffee instead of eating out and stopping at Starbucks on the way to work each day? You may be surprised by how small changes can really add up over time.

5. Living paycheck to paycheck.

Many financial experts are now recommending having 8-12 months of necessary living expenses. If that sounds daunting, begin with a goal that's feasible for you. One of the best places to start is in a Roth IRA. That's because whatever you contribute to a Roth IRA can be withdrawn tax and penalty free for any reason at any time and whatever you don't withdraw grows to be tax free after age 59 1/2. This way you can build an emergency fund and save for retirement tax free at the same time. Just be sure to keep the money invested somewhere safe and accessible like a money market account or fund until you have adequate emergency savings elsewhere.

6. Paying a little extra on all your credit card debt.

That's certainly better than not making any extra payments or not even paying your bill in full. However, you can pay your debt off faster by putting all the extra money towards the debt with the highest interest rate and making just the minimum payments on the rest. As one balance is paid off, you'd then put those payments towards the remaining card with the highest rate until you're debt free.

7. Thinking that borrowing from your home equity is always a bad idea.

Like most myths, there is some truth in this. After all, you are putting your home on the line so this isn't a good idea if there's a decent chance you won't be able to make the payments. That being said, refinancing high interest credit card debt with a home equity loan or line of credit can make sense since your interest rate could be much lower and tax deductible.

8. Thinking that you should never borrow from your retirement plan either.

Like the last one, there certainly is some truth here. Most people think retirement plan loans are free since the interest just goes back into your account. However, there is a very real cost, which is the lost earnings in your account, and a very real risk, which is that any outstanding balance after 60 days of leaving your job could be considered a taxable distribution and subject to a 10% early withdrawal penalty. For those reasons, retirement plan loans should not be taken for frivolous purposes. If you use one to pay off high interest debt, make sure that it's part of a long-term plan to stay debt free. 

9. Saving whatever is left at the end of the month.

If you do that, don't be surprised when there isn't anything left to save. Instead, have your savings automatically set aside before you even have a chance to spend it. The easiest way to do that is in your employer's retirement plan since it's deducted right out of your paycheck. The same is true for medical expenses and dependent care if you're eligible for an FSA or HSA. You can also have money automatically transferred from your checking account to savings accounts and an IRA.

10. Contributing just enough to your retirement plan to get the match.

If it's important to know how much to save for holidays and vacations, it's even more important to know how to save for the ultimate holiday/vacation: your retirement. Contributing enough to get your employer's match is a good start but that probably won't be enough. To get an idea of how much you'll need, take a look at your expenses and think about how each one of them might change in retirement to create a retirement budget. For example, your mortgage and other debts may be paid off but you could spend more on travel and health care. Then use a retirement calculator to see how much you need to save.

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