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Ten Nasty Money Habits
By JLP | May 17, 2006
I saw this article titled Ten Nasty Money Habits to Kick on the MS Money website and decided to highlight it. According to the article, the ten nasty money habits are (along with my commentary):
1. Spending without a budget. Yep. This is just plain dumb. No matter how much you make, you can ALWAYS spend it all. At least it seems that way. That’s why you should have a budget.
2. Carrying a balance on credit cards. Yep. This is another bad idea. If you have credit card debt, now is a great time to get busy paying it off. Interest rates are up and the low credit card interest rates are getting harder to find. Therefore, NOW is a great time to get your cards paid off. This post might help you.
3. Ignoring interest rates. Interest rates affect everything. It’s wise to have a good idea where they are.
4. Not investigating disability insurance. A disability can totally crush a financial plan. Disability insurance can help solve that problem. Check with your employer to see if they offer a policy. It might be more affordable that way. However, remember that an employer disability policy will not be transferable. If you leave the company, you will lose your disability coverage.
5. Failing to see how little purchases add up. This seems to go hand-in-hand with the first habit. A simple straight-line way to see how much a purchase can hurt your retirement plan is to use this formula:
where…
P = Price of good or service you want now. Like a $3.00 latte.
ROR is the expected rate of return
N is the number of years until retirement
an example…
Retirement is 30 years away and you an investment can return 8% (.08 as a decimal) per year over the next 30 years.
So, that $3.00 latte could cost your retirement account $30.19! And, that’s just ONE latte. Imagine if you buy a latte every day! The little things really do add up.
6. Not matching employer’s contribution to retirement. Yes, believe it or not, there are actually people who leave this money on the table. Sure, some of them probably can’t afford (or think they can’t afford) to put away money in their retirement plan. An employer match is just too good to give up. Eat beans if you have to but make sure you are getting your employer’s match.
7. Waiting until the last minute to fund IRA. Make it automatic and then you don’t have to wait until the end of the year to fund your IRA. A $4,000 contribution will cost you $76.92 per week or $333.00 per month. Having this amount automatically deposited into your IRA account will keep you from procrastinating.
8. Paying everyone else, saving “what’s left.” As George Clason says in The Richest Man in Babylon
In my opinion, this amount should be no less than 10% and should come off the top right after your tithe (if you tithe).
9. Not managing your investments. It’s okay to manage your investments by rebalancing. However, don’t overmanage them! If you do, you’ll screw up everything!
10. Getting emotional about your investments. Having the proper asset allocation and rebalancing once every year or two will help you keep your emotions in check. If you find yourself getting upset because your 401(k) balance is falling even though you are putting money into it, QUIT LOOKING AT THE STATEMENTS! Ignore them. Eventually things will turn around and one day you’ll look at the statement and say “Holy Cow! I saved that much?”
Topics: Basics, Financial Planning | 6 Comments »
May 17th, 2006 at 6:22 am
This is a great list. I will share this with my kids.
May 17th, 2006 at 9:17 am
After reading this list, I feel pretty good about our finances…with one major, major problem: We haven’t addressed No. 1 adequately.
I know, that’s huge. Time to check out http://online.wsj.com/public/page/booktools.html
May 17th, 2006 at 9:31 am
Very nice. The Richest Man in Babylon is one of my favorite books.
May 18th, 2006 at 4:56 pm
Number 1 is the most important. Without a written budget how can a person possibly know if they are spending too much. Make sure and have that written budget. Having a written budget has been so critical to my financail life. Once that is in place then you can apply some of the other tips on the list.
May 19th, 2006 at 9:23 am
[...] One of the ten nasty money habits posted on AllThingsFinancial was “failing to see how little purchases add up”, which gives the following formula for showing how much an amount spent now could be worth in the future, if invested: [...]
May 20th, 2006 at 2:57 pm
Good list. Except I think 2 is bogus. HOWEVER most people don’t manage the balance. Why do I think this? Because of the nasty habit that most CC issuers have taken of closing accounts w/o enough activity. It is a business, after all. Example from my own life. I have a Brooks Brothers card with a $700 limit. Do to a funeral, I had to buy some clothing. I maxed the $700. Now, I could have paid it in 1 shot. I split the payments in half over 2 months. Why? Because I don’t use the card much, but it looks good on my credit report. I want to keep it. So the issuer makes some money, I get the benefit of a good report back to the agencies from the issuer (”pays on time”) and the debt doesn’t last any longer than it reasonably needs to. You can’t forget about the debt. But you can and should manage it. I figure 1 – 2 uses of the card per year, and let them make some money somewhere along the line, works for everyone.