Spending Your Money
Money management is the process of knowing where you are spending your money. Ah, the dumb things I've done with money. I've bought the wrong stock. Not wrong as in, "It went down" â€" I make that mistake all the time. I mean "wrong" as in, I misheard the stock symbol and literally bought the wrong one. (It went down too.) I could open a small gym with all the odd exercise equipment I've bought and used just twice. What about the 20% tip I left at a restaurant without noticing that an 18% tip already had been added to the bill? I left a 38% tip! (Which was really a 41.6% tip, because I was adding on 20% to 118% of the cost of the meal!!) We all make money mistakes.
Did you get any gift certificates this holiday season? Use 'em! Millions of us simply forget to, and some have expiration dates. By one estimate, 12% of all gift certificates go unredeemed â€" leaving unclaimed $5 billion in Brooks Brothers sweaters, Sharper Image air purifiers and Krispy Kreme donuts.
Millions of us will be taking "tax-refund anticipation loans". Yet paying your tax preparer an extra $75 â€" a typical surcharge â€" to get your $1500 refund right away is a mistake. At today's interest rates, it takes three years for $1500 to earn $75 for you safely. Why not be just a little patient and "earn" that same $75 in more like three weeks? Just avoid the surcharge and wait for the tax refund to come in the mail. (Indeed, if your tax preparer files your return electronically, your refund typically should be deposited directly into your bank account in just 10 days or so.)
Come to think of it, if your tax return is simple, don't make the mistake of paying to have it prepared. You may be eligible for the IRS's Free File service. If your return is a bit more complicated â€" or you dislike computers â€" locate the nearest Volunteer Income Tax Assistance (VITA) location, available for the elderly and people with low income, disabilities or problems with English.
Most of us failed to set financial goals for the year and making budgets to reach them. It's not too late! Set goals! Estimate your income. Estimate your expenses (by looking back to see where your money went). Will your income exceed your outgo by enough to get you meaningfully closer to your goals?
My apologies to the millions of you â€" out of work, earning near minimum wage, living solely on Social Security â€" with little or no income. Your goal, obviously, is just to survive. But to those blessed with enough money to make at least a few choices, budgeting is well worth the day it takes to do it. Hey! It's your life! Take control of it! Amazing things can happen when you get an overview, set goals and take charge.
More than 50 million of us fail to pay off our credit cards in full each month, incurring high interest charges and, often, ridiculously high "late fees." Why go through life paying 10% or 20% more for everything than you need to? What's the point of earning 1% or 2% or 3% from your savings at the same time as you pay out 10% or 20% in interest on your credit-card balance? Americans pay an estimated $77 billion in credit-card interest.
Nearly 95 million of us own mutual funds. Much of that money is invested in "load" funds, which typically charge 3% just for accepting your money, or in "no-load" funds, which may be better but still charge 1% or 2% a year in management fees and marketing charges. Giving up 1% or 2% a year is a mistake. On average, mutual funds do about average (they sure can't all do better than average!) minus their annual expenses.
If you stick with very-low-expense "index funds" â€" so called because they simply buy most of the stocks in a particular stock market index and then hold them passively â€" you will do significantly better over the long run than most of your friends and neighbors in actively traded, high-fee funds. Indeed, the more actively a fund manager buys and sells stocks, the less well he or she is likely to do.
Most of us keep all our investments in the U.S. Mistake. The U.S. is not at all times the best place to invest. For people with enough assets to diversify, putting a portion to work in international mutual funds should, over the long run, decrease their risk and increase their expected return in a small but real way.
Millions of us use full-service brokers. But brokers are no more likely than mutual funds to do better than average, and the commissions (or "wrap fees") they charge eat into your return. Many people would be better off sticking with low-cost mutual funds.
If they are going to trade stocks, using one of the many "deep discount" brokers that often charge 80% less. In fact, trading stocks is itself a mistake. It's generally better to buy and hold, which is investing, than to trade actively, which is gambling.
Most of us feel more comfortable buying what's in fashion. But when it comes to investing, it's often smarter to buy what nobody else wants â€" cheap. "Buy straw hats in the winter," Bernard Baruch, a financier from the last century, famously said. "Summer is sure to come."
More than 17 million of us may fail to take full advantage of the free money that many employers offer by way of a partial "match" to our 401(k) retirement plans, often kicking in 25 or 50 cents for every dollar we contribute. Can you imagine a bank that offered an extra 50 cents for every dollar you deposited? People would trample each other to get in. Well, that's what this is. Don't waste it.
Individuals who put up less than 20% to buy a home often must buy private mortgage insurance ("PMI") to protect the lender. With time, as they pay down the mortgage and the value of their home rises, their equity rises above 20% â€" yet they forget to call their lender to begin the process of canceling the unneeded insurance. Make the call!
Millions who belong to a gym wind up going so rarely, they'd be better off just paying the daily rate. Why leave the lights onâ€"or the TV blaringâ€"when no one's in the room? Why leave the hot water running the whole time you're shaving or washing dishes? Why set the thermostat at 75Â°F in the winter and 68Â°F in the summer? And don't get me started on gas mileage. There is much to be said for "living light on the land." Waste impoverishes us all.
Really, the two biggest money mistakes almost all of us make from time to time are these: We spend money on stuff we really don't need. In an effort to "keep up with the Joneses," we live at the very edge of our means. It's far smarter to live beneath our means, saving the difference. We grasp at straws, letting hope or greed overwhelm caution and common sense, be it the lottery ticket geared to pay out 35 cents on the dollar after tax (heads, you win 35 cents; tails, you lose $1), or the stock tip we get by the water cooler, or the infomercial at 3 a.m. offering $599 worth of audio tapes that will make you rich for "just" $299. "Slow but steady" is boring. But, in most cases, it truly does win the race.
In the 1980s, guys like Michael Milken and Ivan Boesky - who anticipated the "Greed is good" phrase with a 1986 commencement speech at Berkeley in which he stated, "Greed is all right. ... I think greed is healthy" - were riding high on schemes that failed. Both served as inspirations for Wall Street scumbag Gordon Gekko, but both got off with a few years in prison and a few hundred million dollars lost. Milken shaved a 10-year sentence down to two, and in 2007, still had a net worth of about $2 billion.
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