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4 dumbest things you do with money

The recession has actually been good for changing how Americans handle their money, making them less likely to overspend and more likely to pay off debts. But there are still a number of common money moves that are just plain dumb. Here are four of the most counterproductive things we do with our money and how you can be smarter.

Also see: Smartest things you do with your money

Bouncing checks: Overdraft laws were rewritten two years ago, allowing consumers to block banks from charging massive overdraft fees without any advance warning. But consumers are still bouncing checks and paying some $30 billion per year in fees as a result. To be sure, banks have set the odds of collecting heavy overdraft penalties in their favor by instituting some sneaky policies - such as "reordering checks" - that are now the subject of lawsuits and regulatory inquiry. But it takes two. 

To be charged an overdraft fee, you actually need to spend more than you've got in your checking account. If you don't do that, you don't get charged 35 bucks every time you spend $5 on a latte. Admittedly, some people are just poor -- or starting out -- and their finances are close to the edge. But if you have more than a few bucks sitting in an emergency fund, and you still overdraft, you're making a big mistake. Either put that money in your checking account (and learn not to spend it) or link the savings account to your checking account to cover the overdrafts more cheaply.

Splurging on sales: How many times have you heard somebody say that they "saved" a fortune by buying a bunch of stuff that was on sale? We are psychologically geared to be fooled by "benchmarking," which is comparing the "original price" on the tag to the supposed mark-down price. And retailers know it. Thus they may mark products up in price before they mark them down.  And yet, when you see a sale, you're likely to think that you're saving big by buying bigger. When, of course, you're buying big. Period.

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The Internet and bar codes have made price comparisons pretty simple. Make sure you do your homework before you shop. And then only buy products that you need, regardless of whether they're on "sale" or not. Really want to "save" money? Don't spend it.

Carrying a balance: The good news is that consumers are paying down their credit card balances. The bad news is that they have balances on their credit cards in the first place. If you are carrying a credit card balance every month, you're buying things you can't afford. And, your overspending ways become more costly each month because interest is accruing on old debt while you're building up new. If you can't figure out how to cut your budget, get professional help. You can get budget advice for free at non-profit credit counseling offices, such as those sponsored by the National Foundation for Credit Counseling. If you need to find a local office, go to the site or call 800-388-2227.

Investing through a rear-view mirror: Everybody knows that stocks are miserable investments, right? That's because they've underperformed pretty much every other investment class, including bonds and cash, over the past decade. That's why today's generation of 20-somethings don't want anything to do with stocks.  But here's the problem. The rotten stock market is yesterday's news -- just like the unstoppable stock market was the old and not-soon-to-be-repeated story of 2000 -- it was just that no one knew it until it was too late.

Industry experts will tell you that you can look to the past to see how different types of investment will perform. But you can't look to the recent past. That's because markets are volatile, swinging wildly and irrationally over short periods of time. (And 10 years is a relatively short period, in this context.) That's why you never put the rent money in the stock market. But if you have long-term investments that you can leave alone for a decade or more, you'd be foolish to avoid stocks. 

Over long periods of time -- like the 83 years of market history tracked by Ibbotson Associates in Chicago -- stocks earned roughly 10 percent on average; bonds about 5 percent on average; and bank accounts barely keep pace with the rate of inflation. If you want to boost your buying power over time, look at how corporate earnings are doing now compared to stock prices. If a company's price/earnings ratio is below its growth rate, it's probably a bargain. Look forward at what you think is going to happen in the economy and with individual companies that you own. Your portfolio is far less likely to crash when you look where you are going, rather than where you've been.

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