Financial Pitfalls

Personal finance can be confusing, and most people make their fair share of mistakes along the way. But Stephanie AuWerter, Editor of SmartMoney.com, has some tips for avoiding the most common hang-ups.

While a credit card is a great idea for occasional splurges or in case of emergency, it's a bad idea to carry a lot of debt. Having too much debt can wreak havoc on your credit score. Thirty percent of your credit score is the amounts owed on yoru cards, and part of that is the portion of your total credit line that is used. From a credit perspective, it's better to have $2,000 in debt on a card with a $4,000 limit than to have the same $2,000 in debt on a card with a $2,500 limit. It's best to keep your balances below the 50% mark.

Another financial mistake that many people make is hanging onto losing investments. If you've got some duds in your portfolio, you might be reluctant to sell. "Your natural inclination is to want to make that money back," says AuWerter. You may be waiting for the stock or mutual fund to recover, but that's often a big mistake. Selling at a loss is a powerful tax strategy and it will give you the opportunity to move on to a better investment. Consider this: If you were buying today, would you buy that same investment again? If the answer is no, it's time to move on.

No one likes facing their mortgage payment every month, so when an offer comes up to help pay it off quicker, some people jump at the chance. Some companies send offers in the mail saying that, for a fee, you can split your monthly payment in half by paying every two weeks. By doing so, you'll make 26 payments a year - the equivalent of 13 monthly payments. "What you're really doing here is prepaying your mortgage," says AuWerter. In turn, you pay down the principal faster and save on interest. But here's the catch - you shouldn't have to pay that fee. "You can almost always do this on your own," says AuWerter. With most mortgages, you can pre-pay whenever you want at no charge. So, don't pay an outside company for something you can do on your own for free.

Many parents want to do everything they can for their kids, including paying for their college education. However, doing so often means that other financial goals - like saving for retirement - are put on hold. That's a big mistake. After all, there are loans for college costs, but there are no loans for retirement. "What you want to do is max out your retirement savings first and then move on to college," says AuWerter.

Life insurance can also be a little confusing. There are two types, term and whole life. For most people, term life is the way to go. This type of insurance is usually cheaper and AuWerter suggests putting that extra money to good use. There are exceptions, but term life insurance is easier to understand and frees up money that you can then invest elsewhere.

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Financial Pitfalls