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Four Money Mistakes You Might Not Realize You’re Making

Posted By Jim On 09/08/2009 @ 7:37 am In Personal Finance | 22 Comments

One 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 [3] 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 [4].

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 [5]. Not sure where to open a Roth IRA? Check out these discount brokers offering cheap stock trades [6]. 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 [7].

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 [8] and the Vanguard 500 Index Investor Fund [9]. 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 [10])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/four-money-mistakes-you-might-not-realize-youre-making.html

[3] high yield savings account interest rates: http://www.bargaineering.com/articles/high-yield-savings-accounts-rates.html

[4] Devil’s Advocate post on why you shouldn’t adjust your backup tax withholding: http://www.bargaineering.com/articles/dont-optimize-payroll-deductions.html

[5] lazy portfolio: http://www.bargaineering.com/articles/introduction-to-lazy-portfolios.html

[6] discount brokers offering cheap stock trades: http://www.bargaineering.com/articles/cheap-stock-trades-discount-stock-brokers.html

[7] higher yield savings account: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[8] Fidelity Spartan 500 Index Investor Fund: http://www.google.com/finance?q=FSMKX

[9] Vanguard 500 Index Investor Fund: http://www.google.com/finance?q=VFINX

[10] gogri: http://www.flickr.com/photos/gogri/3855181622/sizes/m/

Thank you for reading!