One of the biggest contributors to personal peace is financial peace. It is sometimes assumed that financial peace is only for those who have endless amounts of money. In fact, you can be financially secure at almost any income level. Avoiding common financial mistakes is the first step. This article discusses some of the mistakes that many of us make and how to avoid them.
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financial success, savings, save, finance, finance, money, financial savings, bank, credit card, debt, debt consolidation, consolidate, loan, credit check,
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Copyright 2006 Emma Snow
One of the biggest contributors to personal peace is financial peace. It is sometimes assumed that financial peace is only for those who have endless amounts of money. In fact, you can be financially secure at almost any income level. Avoiding common financial mistakes is the first step. This article discusses some of the mistakes that many of us make and how to avoid them.
I'm too young to settle down
Not investing in a home or buying one too late in life is a mistake that more and more people are making. The following example illustrates why this is a financial error. Let's say Brittany makes $60,000 a year, is single, and rents a house for $2,000 a month. When tax time comes, he has little or nothing in the way of deductions. In 2005, she would have to pay $11,665 in federal taxes alone. If she put that same rent payment into her mortgage payment and bought a $315,000 house with a 30-year fixed rate of 6.5%, her mortgage interest deduction would be $20,236, saving her $5,059 in taxes in 2005.
Tax savings aren't the only reason to buy a home. Another reason is the investment it represents. Let's say Brittany bought a house in January 2005 for $315,000 and it appreciated 5% over the year. A 5% increase in value would give her $15,750 in equity by 2006, and she would also pay $3,657 in principal. Let's add it up. Rent Money Saved, $24,000 + Taxes Saved, $5,059 + Equity Earned, $15,750 + Principal Purchased, $3,657 - Interest Paid, $20,236 = $28,230 or $2,352 per month saved by buying a home. Even if she put $1,000 into that house every month for maintenance, she would still have saved over $1,300 a month buying the house in 2005.
But it was on sale!
Another financial mistake to avoid is accumulating debt instead of saving. Unless debt can almost guarantee you a future return, such as investing in a business, education or your home, it's best to avoid it altogether. Even buying cars in cash is more financially beneficial in the long run. As an example, consider a household that has a $10,000 credit card balance. Assuming a 15% interest rate, if they pay $150.00 a month on the card and don't put anything else on it, their total interest and principal paid on that card is $21,635 before it pays off. It will take them over 12 years to pay it off at this rate. They pay $80 a month in interest for the "privilege" of having credit card debt.
However, there is more to the debt picture. Debt isn't just one-sided, there are opportunity costs associated with debt. If they weren't putting $150 a month on their credit card, they could put it in a savings account instead. Putting $150 a month into a savings account with a 4% return compounded monthly for 12 years would grow to almost $28,000, which is $21,600 in principal and $6,400 in interest earned. So now the real cost of the credit card is the interest paid, $11,635 + lost savings account interest, $6,400 = $18,035 over 12 years, or $125 a month in lost money.
Do you accept VISA for mortgage payments?
Not having any liquid savings is another area that can hurt you financially. The minimum amount saved is 3-6 months of living expenses. This will help cover loss of income or medical emergencies that may occur. This money should only be drawn for major emergencies, not for things like vacations or weddings, for which it should be deposited in other accounts once liquid savings are built up. If no short-term savings are available, the risk of bankruptcy increases. With the new bankruptcy laws, it is becoming increasingly difficult to erase debt.
Liquid savings are especially important if you have a high income that is not standard across the industry, or if the type of work you do is not in high demand. In these situations, it can be difficult to find a new job with the same income. This can leave you vulnerable to rash decisions that can hurt you financially for many years. As an example, I have a friend who made good money at a software company for 20 years. His income was quite high because he had been with the company for a long time. The company was eventually bought and he was fired. He and his family had just finished building and furnishing their dream home when it happened. While they didn't have huge amounts of debt, they didn't have any liquid savings either. To get out of their house payments, they sold their house for far less than it was worth, emptied their 401(k), and both had to take low-paying jobs just to make ends meet. Now, eight years later, they are just beginning to crawl o
Natural disaster...here?
Having little or no insurance is a mistake that many people make in the hope that they will not be affected by a natural disaster. Insurance is your best defense against financial ruin in such a situation. The first step is to sit down and talk with an insurance agent. Make sure the policy covers the things you're worried about. Set aside the money needed for your insurance deductible if disaster strikes. Another thing to prepare for in the event of a disaster is the possibility of being out of work for weeks or months, high medical bills, or being without a car if it is also destroyed in the disaster. Conserving fluids is the answer to these problems. Remember, just because a house or vehicle no longer exists doesn't mean their payments have disappeared.
I have a lot of time to spare
Not saving for retirement is a mistake that is made far too often. If you save, there's a good chance it's not enough for retirement. The results of the 2006 Pension Confidence Survey, released by the Employee Benefit Research Institute, indicate that many American workers are not ready for retirement and will have to work much longer than they expect. As an example, let's look at Jane, who is 55 years old and currently earns $60,000. She hopes to retire at age 65 and has already put away $250,000. By the time she retires, her home will be paid off and she figures she can live on 70% of her current income, or $42,000. If he lives to be 90, he will have to have an income for 25 years. Assume her $250,000 grows at a rate of 7% until retirement and 6% once she starts withdrawing money.
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