13 Financial boo-boos and how to avoid them

Life is just as much avoiding mistakes as it is making sound decisions, and it’s no different where personal finance is concerned. We have choices to make (sometimes a dizzying number!), and we must do our best to make the right ones.

Here are some financial boo-boos to avoid:

Boo-boo #1 – Thinking that you can’t afford to save. You can’t afford not to save. Just cutting out your morning cappuccino can put $20 a week or more in the bank for you, helping you to accumulate capital and improve goal achievement.

Boo-boo #2 – Using “ball park” figures when considering financial needs. For example, buying six times salary in life insurance, or assuming that you need 70% of your current income to retire. Everyone’s situation is different, and failure to consider the particulars of your own can be a major mistake.

Boo-boo #3 – Having too much equity locked up in your house. The financial benefits of holding a mortgage – leverage, tax deductions and liquidity – cannot be overstated. A homeowner should consider having the largest mortgage on which he can afford to make payments, and a line of credit to tap equity up to 80% of the home’s value.

The next five boo-boos have to do with taxes – a virtual snake pit of potential mistakes:

Boo-boo #4 – Withholding too much income tax from your wages, in effect giving Uncle Sam an interest–free loan.  Plan now for your current-year tax liability, and have that amount withheld.

Boo-boo #5 – Using tax-free investments when, for a person in your tax bracket, the return on taxable investments would be higher. Consider your tax bracket and the yield on the taxable investment relative to the equivalent yield of the tax-free one.

Boo-boo #6 – Using taxable investments when, for a person in your tax bracket, the return on tax-free investments would be higher. Again, consider your tax bracket and the yield on the tax-free investment relative to the equivalent yield of the taxable one.

Boo-boo #7 – Failure to match losses with gains, when possible, to avoid taxes when you sell an investment.

Boo-boo #8 – Viewing tax-deferral or tax-avoidance as the most important aspect of a financial move. While important, taxes should not be the sole consideration. Your time constraints, risk tolerance, tax bracket and other financial goals and objectives all should be part of the equation.

Boo-boo #9 – Buying the wrong type of life insurance simply because it’s what is being sold. The person selling the insurance is probably not the best person to advise you on what you need. His or her incentive often is only the commission, which is higher for some products than for others.

Boo-boo #10 – Not planning for the efficient distribution of your estate (and custodianship for your children) when you die. It is unbelievable how many people with assets and children don’t have even simple wills. If you don’t have a will, when you die some judge will decide who gets what. If he’s having a bad day, you’re out of luck. Call a lawyer TODAY and draft or update your will, trust and powers of attorney.

Boo-boo #11 – Letting emotion drive your investment decisions. Investment catastrophe can take place when objectivity is overshadowed by fear or greed. If you are buying or selling an investment, do it for a sound reason.

Boo-boo #12 – Paying interest of more than 6% on a credit-card balance. You should NEVER do this.

Boo-boo #13 – Not contributing to your employer’s retirement plan, even though your employer makes a matching contribution. Borrow the money if you must, but don’t let that matching money get away! If you do, you can watch and cry as it swirls down the drain.

Everyone makes boo-boos. They’re part of life, and they’re usually not fatal. But like the child who falls off his bike and scrapes his knee, we must learn from our mistakes, get up and get going again.