10 tips to help you avoid personal finance mistakes

Letting emotions drive
financial decisions isn’t the smartest thing to do.

DALLAS MORNING NEWS

DALLAS — All of us make financial mistakes, but there are some doozies that can really do lasting damage.

We commit those mistakes for several reasons: ignorance, fear, ego, a desire for immediate gratification.

Notice that all those involve emotions.

“We make our decisions on an emotional basis — all of us do,” said Rick Salmeron, a certified financial planner and head of the Salmeron Financial Network in Dallas.

It can be dangerous.

So in the spirit of helping you avoid committing those financial faux pas, here are the top 10 personal finance/financial planning mistakes many of us make.

1. Not having a goal and a plan for how to achieve it

Absent winning the lottery or receiving a fat inheritance, financial success doesn’t just happen. You have to know what you want to achieve and then decide how to get there.

“Your financial future is in your hands,” said Lynn Lawrance, a certified financial planner at Financial Network Investment Corp. in Dallas. “You can either make it happen deliberately or it will happen to you.”

Spending and debt

2. Not being willing to change your behavior so you can get to where you want to be

This includes failing to admit that you’re living beyond your means.

Try keeping track of all your expenditures for a couple of months, and you’ll be shocked at where your money’s going. That cup of latte every morning can add up to big bucks by the end of the year.

3. Not paying off your credit card debt each month

Credit cards can be a great convenience, and they’re necessary today for things such as reserving a hotel room or rental car.

But misuse them, and they can seriously jeopardize your financial future.

“Having balances on your credit cards is like trying to do the backstroke in quicksand,” Salmeron said. “Pretty soon, you’re drowning.”

4. Making only the minimum payment on credit card debt

If you carry a balance and you’re making only the minimum payment each month, you’re on a treadmill to nowhere.

“A $3,000 balance at 18 percent interest will take more than 22 years to repay if you only pay the minimum,” said Greg McBride, senior financial analyst at Bankrate.com. “If you pay just $75, but do it every month rather than just the first month, you can repay that balance in approximately five years.”

Saving money

5. Failing to save at all or to save enough

“Just because you have some money doesn’t mean you have to spend it,” Lawrance said. “If you’re out of money before the month ends, what will you do when your paycheck stops permanently?”

What you need is an emergency fund that you can use for unexpected expenses. It also will reduce the need to use high-interest debt, such as credit cards, as a last resort.

Most financial planners recommend that an emergency fund have enough money to cover three months of living expenses.

6. Waiting too long to save for long-term financial goals

“Delay in saving for major goals, such as college or retirement, increases the amount you’ll have to ante up later,” Lawrance said. “Time is either your friend or your enemy.”

You don’t have to put away a lot all at once if you start early, but you do have to start, and you need to contribute consistently.

7. Failing to take advantage of benefits provided by your employer, such as your 401(k) or life insurance

One of the best moves you can make is to start an automatic savings program through your employer’s 401(k). You won’t miss the money, and you’ll have a head start in saving for retirement.

Life insurance and investing

8. Not having any or enough life insurance

The purpose of life insurance is to provide for your family after you die.

“The probability of getting a flat tire while driving is a fraction of 1 percent,” Salmeron said. “The probability of dying is 100 percent. Would you drive without a spare tire in the trunk? Then why wouldn’t you carry enough life insurance?”

9. Overinvesting in company stock

“I gag when I see people load up on their company’s stock,” Salmeron said. “Just as the medical professional encourages a well-balanced diet, I encourage a well-balanced portfolio.”

Consider the case of Enron Corp., where employees had more than 60 percent of their retirement money invested in company stock. Workers lost about $1 billion in savings when Enron imploded in 2001 and its stock fell from $90 a share to nothing.

Financial planners say you shouldn’t have more than 20 percent of your retirement money tied up in company stock.

10. Letting emotion drive your investment decisions

You may put too much money in your company’s stock because you fear the unknown of investing in a company you’re not as familiar with.

Likewise, when stock prices fall sharply and your fear kicks in, you tend to sell at a loss and wait to get back in when the market rises back to its original level.

“I can think of no quicker way to lose money than letting your emotions determine how you invest,” Salmeron said. “As an investor, you should check your excessive optimism at the door. You might believe you’re the next guy to spot the next Google or Microsoft, but the odds are you’re not.”