Money Mistakes You Can Avoid
Need more money? Then stop making the most common mistakes with the funds you have, advises SmartMoney magazine (www.smartmoney.com) senior writer Russell Pearlman.
He told The Early Show co-anchor Hannah Storm Wednesday the money you lose when you blunder really adds up, and the miscues are so common and easy to make, you probably don't even realize you're making them.
Avoiding them can mean big benefits for your bottom line, Pearlman says, stressing that awareness of your financial behavior can save you thousands of dollars.
Pearlman shared word on four of the seven common money mistakes mentioned in a SmartMoney piece on the subject: saving with the right hand and spending with the left, living in the moment, throwing good money after bad, and following the crowd.
He says many studies in the past 20 years show people aren't very good with financial decisions. Emotions and feelings can distort those decisions: We can, among other things, be overconfident, succumb to pressure, and misunderstand the risks we're taking. There are pitfalls people face when it comes to investing or handling their finances. Keeping them in mind could mean you don't make them over and over. The mistakes are engrained in human nature but, if you think about the behavior and stop it, it could save you thousands of dollars over time.
To see the complete article on this from SmartMoney, click here.
The errors discussed on The Early Show:
SAVING WITH THE RIGHT HAND AND SPENDING WITH THE LEFT
Everyone does it. You make a good habit of putting money aside for education or retirement, and maybe the account pays 5 percent. But then you have this credit card and you pay 15 percent in interest. What you think you're saving with one hand you're giving up with the other.
SmartMoney recommends that you get a software package and set up a budget. You'll suddenly see — what's in green, you're saving! But what's in red, you're losing. It will show if you're a net saver or net spender. It's a good way for you to see your complete daily finances. This practice is called mental accounting: You realize, "Hey, I'm saving money in this one bucket, but it's cancelled out because I'm spending all this money in the other bucket." People think the two don't correlate, but they do. Once you look at everything together, you'll realize you're probably doing it.
LIVING IN THE MOMENT
If you're faced with an unpleasant or complicated task, you'll put it off. If you could watch an hour of "Survivor" or spend an hour organizing your finances, odds are you'd choose "Survivor." But that's a real detriment for your finances. Procrastination is one of the main reasons employees don't take advantage of their 401(k) plans. They often don't put in enough to bring it to the level where the company will match the amount, because they don't want that much money taken out of their paycheck. But the long-term benefits will surely outweigh the short-term costs. Most people choose immediate costs and immediate rewards more than delayed costs and delayed rewards.
To avoid this mistake, make short-term, financially painful decisions now, to save you down the road. Any little bit you save now will reap huge rewards in the future. Invest in education and retirement and savings now. Don't wait. The pension protection act passed a few years ago will go into effect by year's end. It will automatically enroll people into your company's 401(k) once you start with the company, which should help some procrastinators.
THROWING GOOD MONEY AFTER BAD
This is called the "sunk cost effect." You bought a car several years ago; it's worth $4,000, but it needs $5,000 in repairs. You don't want to be bothered with the stress of buying a new car, so you repair this car, even though it isn't cost-effective. People do this with cameras, appliances, cars, etc. It seems counterintuitive, but people do it all the time.
The easiest solution is to ask for a second opinion from someone outside the equation; someone who didn't invest in the car and has no attachment to it or the situation will give the best advice. An outsider will tell you it's not a good decision to repair this car when there are newer, cheaper, better versions on the market now. Ask yourself, "Does it really make sense to make this costly repair even if it seems more hassle to look for a new car?" The rule is to decide how to spend time and money based on how much time and money you've already spent.
FOLLOWING THE CROWD
This is called "herding." It's a form of financial peer pressure: You're investing because other people are doing it, or the stock market is going really up, or you take stock tips from family and friends, and you don't want to feel like you're being left out. It's the same with dumping: When everyone's telling you, "Get out, get out," and you listen. These are not the right reasons to make these decisions.
Why go against the herd? There's actually good research that says, when everyone says things are looking bad for the stock market, that actual means there are good returns in store for stocks. Do your own research. This is the financial equivalent of being asked to take a drug at a teen party: Say no.