1. Buying Too Much House
While it’s never smart to be penny-wise and pound-foolish when making important investments like buying a new home, it’s also never smart to think, “Oh, what’s another hundred thousand dollars when I’m already spending more than I ever have?” The answer is quite a lot and possibly more than you can handle.
While it’s never smart to be penny-wise and pound-foolish when making important investments like buying a new home, it’s also never smart to think, “Oh, what’s another hundred thousand dollars when I’m already spending more than I ever have?” The answer is quite a lot and possibly more than you can handle.Besides a higher mortgage payment, factor in the costs of homeownership, which grow with the value and size of the home: Property taxes, home insurance and energy costs, for starters, not to mention future maintenance costs. As a general guideline, it’s best not to spend more than 2-1/2 times your income on a home. Your total housing payments
should not exceed 28% of your gross income. Total debt payments, meanwhile, should come in under 36%. That means payments on all loans, including your mortgage loan, school loans, auto loans and credit card debt.
2. Only Paying The IRS and Not Yourself
Small business owners have a lot to worry about, and retirement usually gets bumped from the list in favor of more near term concerns. But there are some serious tax breaks to be had if you set aside some money for retirement now, breaks that will reduce the money you owe the IRS, and boost what you pay yourself.
Small business owners have a lot to worry about, and retirement usually gets bumped from the list in favor of more near term concerns. But there are some serious tax breaks to be had if you set aside some money for retirement now, breaks that will reduce the money you owe the IRS, and boost what you pay yourself.If you’re self-employed, you may contribute up to 25 percent of your self-employment income (gross income minus expenses) to a SEP (Simplified Employee Pension) and deduct the full amount. You can also set up SEPs for your employees and make tax-deductible contributions to them.
Another option, though less flexible, is the SIMPLE 401(k). If you have 100 or fewer employees and they each earn at least $5,000 a year, you and your employees can contribute up to $10,000 a year pre-tax and your company must match the contributions.
3. Buying & Holding
Your inertia could be costing you. So, look at everything with an objective glance. And ask yourself, what does this do for me?
Consider your stock and bond investments. Do they still fit with your investment plan? Maybe you have old stocks whose growth days are past and which may be trading at a loss from when you got them all long time ago. In that case, you might harvest your tax losses. That will offset your capital gains now and in the future, thereby reducing your tax bill. And it will free up money to be invested more profitably.
Next, consider your cash holdings. If you have tens of thousands of dollars, or more, sitting in low-rate savings accounts or certificates of deposit, “you’re just giving money away,” Smith said.
For your longer-term money, it could earn much better returns in a broadly diversified, low-cost index fund. For emergency funds and money you’ll need soon for upcoming expenses like a down payment, at least make sure you’re getting a rate of 4.50 percent to 5 percent on it. Typically, Internet accounts offer the best rates, such as those at ING Direct.
4. Driving Too Much Car
Certified financial planner Betty Smith has seen couples with car payments totaling $1,400 a month. Would it kill them, she wonders, to drive cars that combined would cost them closer to $800 or $900?
Another planner, Peter Childs, has suggested as a rule of thumb that you don’t spend more than 8 percent of your monthly gross income on a car payment, less if you have credit card debt.
Money Magazine has estimated that driving less expensive cars could yield an additional $180,000 over 30 years, assuming you invest your savings. Remember, in addition to your monthly payments, you’ll be paying for insurance, fuel, maintenance and repairs.
5. Ignoring Your Debt
If you’ve got debt that you can’t pay off in full, you may end up paying more than you have to if you just assume that there’s nothing you can do about it. In fact, you might be able to reduce what you owe if you keep an eye out for lower rates that may be available to you.
If you got an adjustable-rate mortgage at a low teaser rate in the past couple of years and it’s scheduled to reset to a much higher rate, now may be the time to consider getting a fixed rate mortgage.
If you’ve got credit card debt, transferring your balance to a lower rate card can save you money … if you do it right. Make sure that there’s not an onerous balance-transfer fee; and if there’s not, move the balance to another card but be sure to pay it off before the low rate expires.
Also, to avoid lowering your credit score, don’t close the higher-rate account after you transfer your balance out of it. If you do, you’ll lower your total credit limit, and that will negatively affect your debt-to-credit-limit ratio.
Spoiling Yourself Too Much
Living above your means and charging the difference is the financial equivalent of slow carbon monoxide poisoning. It makes pre-existing financial problems worse and can be the cause of headaches and shortness of breath until you address the source of your problem.
The solution: “Don’t always keep buying what you want. It’ll get you in trouble,” certified financial planner Betty Smith said. If you’ve built up a credit card balance, figure out the fastest way to pay it down. First consider whether it makes sense to transfer your balance to a lower rate card. (See the last slide.) Then figure out how long it will take you to pay off your debt under different scenarios. (For help, try CNNMoney.com’s Debt Reduction Planner).You might also figure out where you can squeeze out some money from your current budget to make the highest payment possible. Then automate your payments so that they go straight from your bank account to the credit card provider to avoid late fees or missed payment penalties.
Source = CNN.MONEY
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