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Four Money Mistakes You Might Not Realize You’re Making

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Blind SpotsOne of the biggest challenges in almost anything you do is knowing where your blind spots are. In simpler terms, you don’t know what you don’t know. :)

So today, I’ll point out four money mistakes you might be making that you don’t even realize you’re making! Hopefully, you’re making none of them. If you are making one of these, don’t beat yourself over it. Now you know you’re making it and you can take steps to fix it.

Paying Too Much Tax Too Early

Would you give the government several hundred dollars a month, for no reason, just for the government to write you a check in April? Would you give the government a zero interest loan? Probably not (if you would, feel free to send me money!). However, that’s exactly what you’re doing when you get a tax rebate in April.

Known as optimizing your withholding, you should adjust your withholding so that you get a very little rebate in April. I wouldn’t be too aggressive about it, owing taxes isn’t fun, adjust it a little so that you keep the money for your needs. You can put it towards your savings, earning interest, or you can put it towards projects, products, or services you’ve had your eye on. Either way, it’s your money, you should keep it.

I listed this “mistake” first because it’s a minor mistake, if one at all. With how low high yield savings account interest rates are, the interest you would have earned by reducing your withholding is minimum. Couple that with the strategy many people using of “forced savings,” you can’t spend what you don’t have, and your withholding can be used as an advantage. You can read more about these ideas in my Devil’s Advocate post on why you shouldn’t adjust your backup tax withholding.

Overanalyzing Things

Analysis paralysis. Paradox of choice. This little demon has many names but the end result is the same: you don’t make a decision and it’s costing you.

This problem happens most often in 401(k) plans where there are dozens of fund options. Do you want a balanced fun? An index fund? What about emerging markets? What about blue chip? Small cap? Bonds? Treasuries?

What happens? You don’t pick anything. You aren’t invested because you don’t know what you should have, what what amounts, etc.

My advice is to set a deadline on any of the decisions you need to make a stick with it. The reality is that it’s better to have made a decision, especially when it concerns investing or saving, than to put it off. Every single day you delay is a day of interest you could be earning. Need some ideas for investing? Consider a lazy portfolio. Not sure where to open a Roth IRA? Check out these discount brokers offering cheap stock trades. Just pick one.

Maintaining Too High A Checking Account Balance

This isn’t a killer money mistake but one that many people make. If you know how much you’re spending each month, you should try to maintain as low a checking account balance as you can and save the difference in a higher yield savings account.

How do you check this? One way is to budget so you know how much you spend. Another way is to look at your daily balance and see how low it ever gets. If your balance hasn’t gone under $5,000 in the last few months, you might want to take at least half of that and put it in a savings account. Savings account rates aren’t phenomenal but they’re better than getting nothing.

Overpaying For Index Funds

An index fund is a simple creature – match the benchmark index. An S&P 500 index fund matches the holdings of the S&P 500. Easy as pie. The mistake here is that you might be overpaying for an otherwise simple product.

Two of the cheapest index funds, and we’ll use the S&P 500 index as an example, is the Fidelity Spartan 500 Index Investor Fund and the Vanguard 500 Index Investor Fund. The Fidelity Spartan 500 has an expense ratio of 0.10% and the Vanguard 500 has an expense ratio of 0.18%, which is 80% higher.

If you have your holdings in the Vanguard 500, I’m not advocating you move your funds to Fidelity. However, if you are paying more than 0.18%, which is already an 80% premium over Fidelity, then you’re definitely overpaying.

Is there a money mistake you recently discovered that I might be committing but don’t know about? Let me know in the comments, we all need help finding our blind spots!

(Photo: gogri)

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22 Responses to “Four Money Mistakes You Might Not Realize You’re Making”

  1. Procrastination is probably my biggest money eater! I often wait for no reasons:
    - to get my money back from my insurance
    - to shop for my car insurance premiums
    - to consolidate my debts with the lowest interest rate
    - to optimize my investment accounts with ETF’s (like you said!)

    I also find that in these rough economic days, people are focusing too much on saving money instead of trying to increase their income. Hence, they will spend hours to save a few bucks where they could have maybe made $10/hour working on increasing their income ;-)

  2. zapeta says:

    I’m definitely guilty of the first one. I did some calculations and my federal refund should only be in the neighborhood of $200 this year so that isn’t hurting me too badly.

    I’m also guilty of the third one, but I have rewards checking so its actually a good thing to let my money sit there and earn a lot more interest than in a savings account.

  3. I suffer from acute analysis paralysis. It’s taken a lot of hard work, but it can be overcome.

    • Tyler–I found this out about myself early in life. It’s one of those fortunate bad habits that can be controlled, but as you said it’s hard work! It’s trying to work intentionally against your own way of thinking. I think it’s also a form of perfectionist thinking, which means an inordinate fear of making a mistake.

      Mechanically, I make a decision to decide. This isn’t semantics either, you have to create a sense of urgency to make a decision otherwise you can analyze to the n-th degree and never do anything.

      You also have to realize that you may not make a perfect decision, and that’s OK, but a less than perfect decision is usually better than doing nothing.

  4. HT says:

    I like VTI. .07% total fees. More diverse than the S&P…

    -HT

  5. Jake says:

    You’re not quite comparing the same thing by looking at the fees alone for the Vanguard 500 and Fidelity Spartan 500 Investor because of the differences in investment minimums. Both the initial contribution and subsequent contributions are higher for Fidelity than for Vanguard – $10,000/$1,000 and $3,000/$100, respectively.

    If you’re not going to mention the minimums, why not include the Fidelity Spartan 500 Advantage fund with a low 0.07% fee and $100,000/$1,000 contributions?

    Otherwise, great recommendations to help people realize that low expenses are the way to keep and build their wealth.

  6. FreedIncome says:

    Hey Jim,
    Were did you find the cost of the index funds? Is there a free screener out there?

    Thanks.

  7. Don Chouinard says:

    I am new at this,and elderly.Why are your e mails,cut off on the right hand side? Am I doing somthing wrong?I get a lot of free e mails and yours is the only one like this? Don.

  8. I’m definitely guilty of the first one. I just really fear making a mistake with my withholding and then having to pay. The checking account is definitely not a problem for me. After I pay my bills and transfer money to savings, I usually have less than $100 in my checking account.

    • My Journey says:

      Cents,

      I am with you! I have to make myself feel poor in order to live my life the way I want. I can’t have more than 2K in my checking or I start spending on STUPID stuff!

  9. Strick says:

    If you get a $2600 refund (fairly average), then you have overwithheld $50/wk. If you are paid weekly and (to maintain the “forced savings effect”, which I agree is important) at the same time you decrease your withholding by $50/week you increase some automatic retirement contribution by that same $50/week, you have sped up your investing over waiting for the return and investing then. Running a calculator comparing the difference of investing averaging 8% over 40 years at $50/wk versus investing the same $2600 but just yearly, I get:
    weekly contrib: $104K contributions + $623K gain
    Yearly contrib: $104K contributions + $596K gain

    Sure the assumptions and final numbers can vary greatly, but thats a fairly significant difference for something that is just a single trip to HR. Now figuring out when you have the right amount withheld (especially when congress is comfortable with changing the tax laws well into the tax year and applying them retroactively) is a different story.

  10. Ryan says:

    As long as we are talking about taxes, learning about all your tax deductions is just free money. For example, if you have a hobby that requires a lot of money (knitting, or painting) the IRS allows you to deduct those hobby costs as long as it fits certain guidelines. You could take it one step further and turn that hobby into a business venture. A qualified business is able to deduct so many things that it can be worth your time to run a small business, like selling your knitted hats or teaching someone to paint. The best part of owning a business is that you can withhold paying taxes much longer than you can as an employee. If you deduct enough, perhaps there will be no taxes to pay.

    However, I like the comment above about being penny wise and pound foolish. If it takes 2 hours of your time to save 6 bucks on a purchase, that is the equivalent of working $3/hour. Was it really worth the time and effort to drive 1 hour each way to that store that is having a sale when you could have paid the extra 6 bucks at the store near you and had the extra two hours to do something more enjoyable?

  11. RON says:

    HOW CAN YOU SAY THAT PAYING IN TOO MUCH TAXES VIA ESTIMATED TAXES OR GIVING THE GOVERNMENT A LOAN VIA WITHOLDING TAXES IS A MISTAKE? THE MORE MONEY IN TAXES PAID TO THE IRS DURING THE YEAR AND RECIEVING AN EVENTUAL TAX REFUND, IS POSITIVE PLANNING SINCE YOU RECEIVE 4% INTEREST ON YOUR REFUND. WHERE CAN YOU GET A RETURN OF 4% RISK FREE TODAY IN A CD OR MONEY MARKET ACCOUNT?
    WOULD APPRECIATE RECEIVING YOUR COMMENTS VIA E-MAIL ON THIS.
    THANK YOU

    • Michael says:

      The federal government does not pay interest on income tax refunds, hence a 0% loan to the IRS from you.

  12. Trevor says:

    The one thing not thought of is using a checking account that actually pays you interest. These are smaller banks a lot of the times like Arizona Bank and trust that pays me 4% for the money in my checking acount. A lot better then the .3% in a savings account.

  13. Over analysis is something I do often, then again my career is as a financial analyst so I guess it comes with the profession.

    Big fan of not over paying taxes up front. Much rather owe the government at the end of the year than get a refund.

  14. Jazz says:

    …………what Jake said. Pay very close attention to the expense ratios and get the lowest one that meets your needs.

  15. Great post! The interest free loans to the government is a disgrace . . .

  16. TN.Flash says:

    Want to save some money? Most homes today have a single lever water faucet. When people turn the water on to rise something like a glass or their hands they do not first move the lever to the right to use only cold water. People that leave the handle in the middle are using hot and cold water but guess what, unless there is a water recirculating line, only cold water comes out because of the length of the hot water pipe to the faucet is full of cold water because the hot water has cooled off.

  17. Debra says:

    You were so right-on to include Analysis Paralysis, from which I suffer in many more matters than just financial, but certainly there. For example, I’ve wanted to buy a little gold since it was in the $950 range several months ago, but felt like I needed to research it first as an investment. My research led me to several so-far unresolvable questions: how much to invest? Recommendations I’ve read range from “5% or less” all the way to 30%. What sort to buy? Numismatics for greater appreciation and in case of confiscation? Since our government thinks it can do whatever it wants, why would I expect numismatics to continue to be exempt if we again face confiscation? Where to store it once I have it? Was inclined toward a safe deposit box (rather than a gold storage facility, foreign bank, or underground). Then I saw a video of a Calif. woman whose bank box was declared abandoned (accidentally or arbitrarily?), her valuable family heirlooms seized and auctioned w/proceeds to the general fund – all while she had an active checking account at the bank, paid her box rental regularly, and had her name & address on many documents inside the box.

    The cumulative effect on me of all the recent economic and financial news is that I feel like I can’t trust ANYONE — in banking, financial advising, fund management or government.

    So, as you noted, the dollar cost of my analysis of this investment will be somewhere upwards of $60/oz. IF I can ever make up my mind as to what course of action is the least risky. I’d like to add that the emotional cost is also huge, from the anxiety of KNOWING this is an investment I MUST make if I’m to have a financial future, fearing that I’m running out of time, and still not being able to decide. Thank God I have a therapist!

    Thanks for your good article. Glad to know I’m not alone in my paralysis.

    Debra

  18. daemondust says:

    Amazingly, I managed to get my withholding almost perfect last year. It was spot on for federal, and I got a $1 refund from the state because of a rounding error I made.


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