Common Money Mistakes

It's hard enough earning a living, but the next big step is making the right decisions on how to handle money. The wrong decisions can cost a bundle, so The Early Show financial adviser Ray Martin has tips on avoiding those pitfalls.

There are some money mistakes that seem to pop up more frequently than others. When it comes down to money and financial matters, many people are not as confident as they should be and are far too trusting to take advice from family and friends. As a result, sometimes folks and their money can end up in bad situations.

It's also often stated that the root cause of many bad money habits is that parents and schools have not made a sufficient effort to teach financial management. But Martin doesn't buy that for two reasons: first, it's in the past and there's not much you can do about that and second, the money matters we have to deal with today are much different than those people had to deal with even 10 years ago. (Think online banking, credit scores, ID theft, exchange traded funds, etc, and you get the picture).

For some people, particularly those with spouses and partners, one person in the relationship may assume control of all financial matters and decisions. Perhaps others, especially caregivers, get sandwiched between family, care giving and career obligations. As a result, some folks either delegate or simply feel they don't have the time to pay attention to their own personal financial matters. Regardless of the reasons, people who make these money mistakes are headed for a future of money trouble. Here are some of the most glaring money mistakes to avoid when it comes to your money matters:

MAX OUT 401K CONTRIBUTIONS

According to the 2005 Retirement Confidence Survey, a majority of workers, 55 percent, believe that they are behind schedule when it comes to planning and saving for retirement. Most of those behind schedule point to high every day expenses (49 percent), child-rearing expenses (39 percent) and medical costs (35 percent) as the major obstacles to increasing their retirement savings. Their beliefs are well founded: the median amount saved for retirement by workers age 50 to 59 years old is just $53,400.

Workers age 50 or older can make an additional $5,000 catch-up contribution to the 401k plan account, for a total contribution of $20,000 in 2006 - but surveys of 401k plan participant behavior typically find that only 20 percent of workers age 50 or older make these additional contributions.

More workers will have good reason to increase their retirement savings - a number of large companies, such as IBM, Alcoa, Verizon, Motorola, Hewlett Packard, etc., have announced pension freezes, or cuts to their pension plan benefits. These pension freezes mean the newly hired workers will not have any pension benefits and existing workers will no longer accrue additional benefits. The best defense workers will have against theses pension cuts is to immediately increase retirement savings.

DIVERSIFY COMPANY STOCK IN 401K

According to the Employee Benefit Research Institute, about half of 401k plans surveyed offer employer stock as an investment option. According to the Hewitt 401k Index, employees held an average of over 23 percent of their 401k plan accounts in the stock of their employer. In some 401k plans of large companies - such as General Electric, Pfizer and Proctor and Gamble - employees keep over 60 percent of their 401k plan money in the stock of their employer. Don't think this is a big deal?

Think again; when a company's stock drops significantly and stays down, it's usually a sign of deeper problems (think Enron, Merck, Marsh & McLennan, etc). Management responds to shareholder concerns by enacting draconian expenditure cuts to get the company back on track, which could spell trouble for many employees' jobs. Trouble in one major company is often a sign of tough times for all of its peers in the same industry or sector (think steel, airline and automobile companies). Jobs are cut and those employees will have a hard time finding work in that industry.

The risk of too much employer stock in your 401k plan account? Losing your retirement savings and your job is the double jeopardy of owning too much company stock in your retirement plan. The cure is simple: diversify the money in your 401k plan savings away from company stock and into other diversified funds that invest in different asset categories such as stocks of large and small companies and foreign stocks.

NEGOTIATE THAT RAISE

By not negotiating that very first salary offer at the very first job, an individual stands to lose more than $500,000 by age 60. But men are more than four times as likely as women to negotiate a first salary, according to research conducted by a pair of authors (Linda Babcock, an economist at Carnegie Mellon University and a leading scholar of negotiations, and Sara Laschever, a freelance writer) who wrote a book entitled "Women Don't Ask."

While men compare negotiations to "winning a ballgame," women are more likely to compare the process to "going to the dentist." And many women are so grateful to be offered a job that they accept what they are offered and don't negotiate their salaries. They also fail to realize the market value of their work (women report salary expectations between 3 and 32 percent lower than those of men for the same jobs; men expect to earn 13 percent more than women during their first year of full-time work and 32 percent more at their career peaks).

You may think that not negotiating for a couple extra thousand dollars over the course of a year is no big deal. But if you're giving up a couple thousand dollars a year for 40 years, you're really putting yourself at a disadvantage and will be missing out on thousands of dollars that, with a little bit of negotiating, you would get. One study found that male graduates of an Ivy League business school negotiated for a 4.3 percent higher starting salary than they were initially offered, while female graduates negotiated for just 2.7 percent. If the first offer was the same for each, say $35,000, this would amount to a $560 advantage for the men. Over time this advantage could snowball. If men negotiated a 2 percent raise each year and women accepted 1 percent, after 40 years the annual salary would be $79,024 for men and $52,987 for women, nearly a 50 percent gap. The cumulative gap over a career would exceed $440,000.

BUILD OWN CREDIT HISTORY

People often underestimate the importance of a good credit score. Do not rely on your spouse's good credit score because if the time comes when you part ways, you're going to need a good credit history to help handle debts and finances. Before the need arises, and when it is easier and less stressful to do so, individuals should get at least one credit card in their own names and use it on a regular basis. Keeping a credit account in use and current will help to build a credit history that could be very useful one day. Everyone should have his own individual credit report. You need to know how to get your score, and what to do to boost your score. Folks can get a free copy of their credit reports and credit scores once per year at Annualcreditreport.com

REVIEW DETAILS OF TAX RETURN BEFORE SIGNING:

Before you sign any tax return, you need to know the details. You, not th etax preparer, will be the one to pay the additional tax and penalties if your return is incorrect. Even people who sign joint returns with their spouses are at risk if they don't carefully review their returns before signing them. That's because generally joint and several liability applies to all joint returns, which means that you are jointly AND individually responsible for any underpayment of tax that may become due. This applies, even if a divorce decree states otherwise. Only in very narrow special circumstances can a spouse claim relief from a nasty tax surprise due to the tax reporting misdeeds of a tax-cheating former spouse. People in this situation should read IRS Publication 971, Innocent Spouse Relief and
seek the advice of a tax professional.

MONITOR JOINT CREDIT ACCOUNTS

This mistake is similar to signing tax returns without knowing the details, but it often creates far more devastating consequences. It's similar because any two individuals who apply for and accept the terms of a credit account or loan are jointly AND individually responsible for any debts on the account. When late payments are made on an account primarily used by one individual, both individuals' credit reports are negatively affected. When one individual racks up large credit card charges on a joint account used for starting a new business which then fails, the other spouse is liable for all amounts charged up until the joint ownership is ended, regardless of the amount owed and who caused the debt. When authorizing joint credit accounts, individuals should regularly review all activity so that any problems can spotted and addressed immediately.

DON'T BE AN ATM TO YOUR KIDS

Of course, parents have deep feelings about how and when they financially provide for their children. But it's also important to realize that when children are old enough, they should be going out, getting a job and making their own money. Allowing your child to rely on you for money is a recipe for creating bad money habits, and these can be hard habits to break.

Also, sometimes parents are more inclined to give money to the kids out of guilt - maybe for not being home enough, or giving into their constant pleas for a new toy. You, as a parent, need to realize that it's OK to say no, and you should be encouraging your kids to find ways to earn their own money. Better yet, save this list and read it to them later, but before they get too far along in developing their own money management habits.