As a financial planner, I work with many different types of clients. I have school teachers, lawyers and entrepreneurs. And while they all have different financial issues and concerns, I have begun to notice that the same mistakes tend to pop up over and over, regardless of the income, education or financial savvy of the person involved.
So to help you avoid these common missteps, I've put together my top four mistakes and their solutions.
Money Mistake No. 1: Being penny wise and pound foolish.
I have to admit that this mistake annoys me the most and costs you the most. People will regularly drive 30 miles out of their way to save $10 on clothes or a piece of furniture. Other people will spend half an hour a week clipping coupons to save $10 on their groceries. Now, I don't want to discourage people from trying to save money, but consumers should focus their energy first on the areas that will save them the most.
Solution: Instead of spending 30 minutes each week on clipping coupons or driving to a sale, spend that time reading a good book on investing wisely or avoiding expensive, under-performing mutual funds. I like the Coffeehouse Investor by Bill Schultheis or The Successful Investor: 14 Simple Truths You Must Know When You Invest by Larry Swedroe. Making sure your mutual funds are reasonably priced and that you're diversified could save you thousands of dollars a year and tens of thousands of dollars, if not hundreds of thousands, over your lifetime -- a much better return on your time than clipping coupons.
Money Mistake No. 2: Not checking your credit reports.
Whenever you seek credit, whether it's a new store card, a car loan or a mortgage, the lender checks your credit report to determine your creditworthiness. In addition, whenever you apply for a job or to rent an apartment, the employer or landlord often will take a look at your credit score to see how reliable you've been over the past several years.
You'd think that such an important document would lead people follow their credit reports and credit scores as closely as sports junkies follow their favorite team's win-loss record. But, in fact, very few people look at their credit reports, except maybe when they're about to buy something.
That's a shame because about a quarter of all reports include mistakes that can hurt your credit score.
Solution: Check your report once a year. Thankfully, a new law that will be in effect on Sept. 1 for our area that will allow consumers to get a copy of their credit report annually for free from the three main credit reporting agencies.
Each agency differs slightly in the information it carries, so it's a good idea to check all three reports. If you don't want to wait until Sept. 1, your can get all three companies' credit reports on you for about $25. It's worth every penny. The reports come with supporting information on how to read the data and how to dispute mistakes.
Money Mistake No. 3: Feeling so overwhelmed by budgeting that you do nothing.
I have a confession. I don't have most of my clients follow a budget. "What?" you say, "You're a financial planner; don't you make clients track every penny?"
No. If they want to, that's great. And it does help. But it's not the key to their financial success. The key to financial success lies in working out your goals -- retirement, buying a house, purchasing a car, etc. -- and creating a plan to reach those goals. With my clients, once we've designed a realistic plan to reach their goals, the clients can do whatever they want with the money leftover. They don't need a detailed budget because they've already taken care of what's important.
Solution: Sit down and start thinking about where you want to be in five years and how you'd like your life to be different. Literally go through a day in your life five years from now assuming everything went well. Next, write down the things you'd need to do to reach your vision, such as own a home, pay off credit cards or contribute 10% to your 401(k). Then, work out how much you'd have to save each month to reach those goals. Finally, start taking that money out.
Money Mistake No. 4: Failing to talk about money.
In relationships, partners rarely discuss their finances. This is a big mistake. If you don't know how much money you have, where key financial documents are stored or how to pay bills or taxes, you could be in for a rude surprise should you ever need to handle the finances on your own.
Solution: Hold monthly money meetings. Both partners should know what's going on financially, even if they divvy up the financial duties. Even if your partner is in charge of taxes and investments, for instance, you need to have a handle on those areas, and you should keep your partner in the loop on your bill paying and budgeting duties.
To ensure a regular dialogue, you should holding monthly "money meetings" where you and your partner fill each other in on how much you're earning, what your goals are, where your money's going, how much you're saving, and any problems that may be rearing their heads.