You pack your lunch, and never buy items at full price. You pay your credit card on time every month, and save up for that much-needed vacation every year.
If you’re doing these things, you’re likely on top of your finances. But, a new year is always a good time for a new challenge — and we have one for you: In 2014, vow to take your finances to the next level. How? By learning from the pros.
The Certified Financial Planners (CFPs) at LearnVest Planning Services have seen the fiscal situations of a lot of people. They know what mistakes people are likely to make, and they know the best ways to fix them. So we’ve turned their collective wisdom into a must-read guide for turning 2014 into your best money year yet. Read on to find out what exactly not to do — and how not to do it.
1. Not saving for retirement when you’re employed
It’s easy to come up with excuses for not saving for retirement. (See: The 11 Biggest Retirement Lies You’re Telling Yourself) But, you should be saving for retirement whenever you’re making money because there will be a time when you won’t be making any money — but you’ll still have to support yourself. This means that part of every dollar that you earn during your working years should go toward funding your non-working years. If your company doesn’t offer a retirement savings program, open an IRA.
2. Living paycheck to paycheck
While it’s great to know where every dollar will go, the reality is that you can’t predict everything. For this reason, when you create your budget, include a small “slush fund” that could cover that $100 unexpected car repair or surprise doctor’s bill. It’s a little cushion that will also prevent you from overdrawing on your checking account, and paying unnecessary financial fees.
3. Not understanding the importance of your credit score and credit report
One of the toughest things about personal finance: getting your situation exactly to your liking takes time. And, that's especially true of your credit score and credit report. These two items are essentially a record of how you’ve handled your finances over time — and they’ll determine whether or not you’ll be eligible for thousands (even hundreds of thousands) in savings when you go to make your biggest purchases, such as a car or a house.
Develop these habits now, so you’re ready when that big day arrives:
Pay your credit cards and other debt payments on time every month
Use just 10% to 30% of the credit available to you
Check your credit score and credit report three times a year
Dispute any mistakes on your report
Don’t let that little voice tell you, “My credit card debt isn’t as bad as my friend’s debt.” And slap your wrist when you think, “I’ll just pay whatever I can this month.” These are the kinds of rationalizations that “enable” people not to get out of debt. So, if any of these thoughts have crossed your mind, get yourself a plan to get out of debt immediately.
The top three steps to take:
Make sure you aren’t spending more than you earn.
Decide how much you’ll put toward your debt payments each month — and stick to it.
Figure out your deadline — i.e. the moment when, because you’ve stuck to your plan, you’ll be debt-free
5. Not having a budget
If you want to take control of your money, you need to know where it’s going and plan in advance how to spend it. Bottom line: You need a budget that works for you. This may sound daunting, but it’s easy if you follow the 50/20/30 Rule, which is flexible enough to fit any situation. Basically, the rule says that from your take-home pay, you should allocate:
50% to Essential Expenses, which include housing, transportation, utilities and groceries
20% to Financial Priorities, which are retirement, savings, and debt (in that order)
30% to Lifestyle Choices, which are gifts, travel, dining out, shopping, and everything else
Then, track your spending to make sure that you’re sticking with your budget. You can do this through a myriad number of ways, including pen and paper. But, using an automated system will ensure that you don’t miss any expenses, and you’ll see trends in your spending.
6. Not having enough in emergency savings
We’ve extolled the virtues of emergency funds before, but it turns out that a lot of people still only keep $1,000 or $2,000 aside for “emergency money.” This may help you with a last-minute plane ticket, but it won’t tide you over if you get really sick. And if you have what sounds like a lot more — say, $25,000 — consider whether that makes sense for your income. After all, if you’re making $100,000 a year, that’s not going to last long if you lose your job.
Accumulate six months’ worth of income in your emergency savings and only use it for true emergencies. When your income or expenses change (especially if they go up), make sure to increase your fund proportionately.
RELATED: Tips To Start Building Your Savings
Considering grad school? Have a teenager who’s heading to college? Whether you or someone dear to you is planning to take out student loans, you should beware of one of the biggest pitfalls that CFPs see: A lot of people take on huge student loan debt without knowing what their monthly payments will be when they graduate. This is especially common among people attending grad school programs that promise graduates high salaries. Be aware: Anyone who takes on a $100,000 loan, and pays 6.8% interest on it, will be paying about $1,100 a month toward that loan — for ten years.
If you’re certain that it’s worth it for you, learn what you need to know about taking out student loans in our Understanding Student Loans 101 and checklist.
RELATED: A Basic Guide To Budgeting
8. Not understanding the terms of a co-signed loan
Another big thing that can affect your credit is co-signing a loan with someone who doesn’t hold up their end of the bargain, dragging down your credit score. It can take years to recover from this kind of event. Take it from this woman — who saw her stellar credit plunge 200 points.
9. Not realizing that a car payment can affect other goals
A lot of people take on car payments that they can’t afford, accepting a $400 or $500 payment plan without realizing that they’ll have fewer choices when it comes to other financial goals and wants. On top of that, they forget to factor in the cost of gas and insurance, and their car is suddenly guzzling down more than a quarter of their budget.
If you’re reading this, thinking, “Uh-oh...,” don’t worry. You can trade your car in for a less expensive model — i.e. swap a $20,000 vehicle for one that’s $10,000, and halve your payments. Or get a more fuel-efficient car that doesn’t need special gas. If you lease, check out SwapaLease.com or LeaseTrader.com.
Your will allows you to name a guardian for your children in the event of your death. Simple question: If you die, do you really want the state to decide what to do with your kids?
RELATED: Wills & Trusts: Everything You Need To Know
11. Not having life insurance if you have minor children
Again, this is a simple question: In the event of your unexpected death, how would your family cover immediate expenses, such as funeral costs, as well as long-term ones, like mortgage payments? Buying an adequate life insurance policy can help ensure that your family is well protected.
Find out how life insurance helped this family in the wake of a disaster. Then read our Life Insurance 101, and follow our step-by-step checklist, to determine the kind of policy that you need.
12. Not having long-term disability insurance
While an emergency fund is a crucial part of any personal finance plan, you should also have disability insurance. It will help if you endure any long-term illnesses, bringing in, say, 60% of your normal salary — an amount that could allow you to stay in your current home.
Before buying an individual policy, look into whether your company offers long-term disability insurance as part of your benefits package. If so, you’ll likely have to pay extra for this coverage, but it’s much less expensive to be part of a group policy than to buy one on your own. If not, shop around for a policy that covers you for at least two years in your “own occupation.”
13. Not having a plan for your finances
If you don’t have a plan in place for your finances for paying down debt, building savings, or setting aside enough for retirement, you’re not getting ahead. This also means that you’re not going to be able to move ahead as effectively on major life goals.
So, figure out where you want to be in life a year from now — and then see how your money can help you get there.
Sure, we'd all like to be earning more. But, even if that bonus check is nothing but a dream, LearnVest is here to help you make the most of what you've got — read their stories, use their tools, and talk to a pro planner about getting a financial plan custom-designed for you.