Your Financial Ignorance Could End Up Costing You Thousands

Everyone makes mistakes, but you can avoid these common financial blunders and end up saving yourself a lot of money.

None of us like to make mistakes, even though they’re frequently part of the learning process. Still, if you could avoid making mistakes, especially with your money, you’d probably prefer to do so rather than wasting your hard-earned dollars on bad decision making.

If that’s you, take heed. Here’s your chance to learn from others and avoid their mistakes.

A recent study by the National Financial Educators Council (NFEC) found that 28.8% of Americans aged 65 or older said their personal lack of knowledge about personal finances caused them to lose $30,000 or more in their lifetimes.

NFEC asked participants across age groups, “Across your entire lifetime, about how much money do you think you have lost because you lacked knowledge about personal finances?” Across all age groups, respondents said their lack of financial knowledge had cost an average of $9,724.83, with nearly a quarter of respondents reporting a loss of $30,000 or more.

The survey didn’t ask participants how they lost their money, or what bad decisions they made that led them to part with their cash, but the problem frequently boils down to one thing — people thinking they know more than they actually do. Case in point: Another recent study by Sallie Mae, “Majoring in Money: How American College Students Are Managing Their Finances,” looked at the financial habits of college students between the ages of 18 and 24, including the methods they use to pay for purchases, their knowledge and use of credit, and their money management skills.

Of those surveyed, 65% thought their money management skills were good or excellent. In reality, only 31% of these respondents answered three basic financial questions correctly. The questions were on how interest accumulates, how repayment behavior affects the cost of credit over time and how credit terms affect the cost of credit over time. (You can take a financial capability survey on the NFEC site to see how you compare nationally.)

Whatever your age, making financial decisions on assumptions or only part of the facts can lead to frustration and economic loss. But if you’re in your teens or 20s, chances are you haven’t made any major financial missteps, and can potentially avoid them altogether.

Let’s take a look at some of the key areas of the study and address how you can avoid making mistakes that could end up costing you thousands over your lifetime.

Paying Bills On Time

A large majority of respondents to the Sallie Mae survey said they pay their bills on time — a whopping 77%. Not paying bills on time can result in late payment fees. If they go unpaid long enough, there can be a snowball effect when they end up in collections. Suddenly, that unpaid phone bill is hurting your credit scores, which means it will cost you more in interest when you apply for things like credit cards, auto loans or a mortgage.

If you struggle to pay your bills on time, you’ll want to look at exactly why. Is it because you don’t have enough money to make the payments when they come due? You’ll be well served by reviewing your spending habits, creating a monthly budget and sticking to it. Are you just forgetful? Automating your bill payments can help tremendously.

Setting Aside Savings

A surprising 55% of college students reported setting aside savings every month. Having a financial safety net is important in the event of an emergency — your car breaks down, you break your leg and can’t work, you lose your job. Having an emergency fund or savings account is an important first step when it comes to financial security, so take a look at your budget and figure out how you can start saving small, eventually setting aside enough income to live on for three to six months if needed.

Tracking Your Spending

We’ve already mentioned it twice, but we’ll say it again: Having a budget is important if you want to stay in control of your finances, and tracking your spending is an important part of the budgeting process. More than half of college students surveyed (56%) said they track their spending, and you should too. There are lots of helpful apps available to help make it easier.

Having a Paying Job

If you’re in college and aren’t working, you may want to reconsider that choice. 65% of students surveyed said they had a paying job, and there are numerous studies that show students who work tend to manage their time better. Working also gives you the opportunity to manage your money better. Think of the nest egg you could put away if you don’t need the extra spending money.

Getting a Credit Card …

The majority of students surveyed (59%) said their No. 1 reason for getting a credit card was to begin building credit, and that makes a lot of sense. A credit card, wisely used, is one of the best ways to establish credit. There are lots of good credit cards for students that offer added incentives for making good grades and paying bills on time. There are also secured credit cards if you can’t qualify for a standard card, or you can ask a parent or guardian to become an authorized user on one of their cards to help you establish credit.

… & Managing It Well

According to the survey, 36% of respondents said they never charge a purchase without having the money to pay the bill when it arrives, while 23% said they have rarely done so. On the flip side, 25% said they sometimes do this, and another 15% said they do it frequently.

If you’re charging too much on your credit cards because you just need that latest gadget, keep in mind you’re only making life harder for your future self by racking up debt. If you’re charging too much because you’re using your credit card as an emergency fund for unexpected bills, you may want to consider the additional costs you’re incurring to pay off that debt. Putting a little money aside and earning interest on it is a much better alternative financially.

… By Paying Off Balances Every Month

The absolute best way to ensure you don’t get into credit card debt (and to boost your credit scores as much as possible) is to pay off your credit card balances every month. The survey found that 63% of the students surveyed pay off their balances in full each month. These students also tend to have lower average monthly balances — $825 compared to $1,635 among those who pay only the minimum amount due.

Carrying $1,500 in debt every month on a credit card with an APR of 15.99% can cost you more than $200 a year in interest. You can use this handy credit card payoff calculator tool to see how long it will take you to pay down your debt.

Paying Your Student Loans on Time

Just like making credit card payments on time (and in full, if you can) making student loan payments on time can have a significant positive impact on your credit scores, meaning you’ll qualify for better interest rates on better products with better perks. If you’re already behind on your student loan payments, it’s a good idea to contact your servicer right away and sort out how you can get back in good standing. Don’t let your student loans go into default because you’re afraid to admit you need help.

Being Aware of Your Credit Standing

Of the college students surveyed, 67% said they were aware of credit reports, and about half had viewed theirs (you can get two of your credit scores, absolutely free, on Credit.com).

The survey also found that those who had experience with credit were far more likely to have viewed their credit report than those without credit experience. For example, 66% of students with credit cards reported having viewed their credit report, compared with 27% of those who did not have a credit card.

Seeking Professional Help

Making financial decisions isn’t always easy, particularly when you’ve run into trouble. That’s why it’s always a good idea to consider professional help, whether for tax preparation, investing decisions or getting debt under control. Paying a reputable person for expertise and assistance can end up saving money in the long run.

Reading the Fine Print

Life is full of agreements, and many of those include legally binding contracts. Most are on the up-and-up, but it’s still a good idea to fully read any agreement you sign and understand the terms completely. If you don’t, this is another case in which you may want to seek professional help to save yourself frustration and possibly money further down the road.

These are the basics to setting yourself up to succeed financially. Of course, there will be hiccups along the way, but by staying on top of your finances and asking lots of questions, you’ll be able to avoid some of the common mistakes many people make.

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The Critical Money Considerations You Should Make in Your 60s

finances-in-your-60's

The average retirement age in the United States is 63, according to U.S. Census Bureau data. If you are part of that trend, get ready to have your financial world turned upside down in your 60s.

As you trade in your office keys and a steady paycheck for a pension (if you’re lucky), investment income and Social Security, you shift from an accumulation phase to a distribution phase. Once you do, many of the engrained investment lessons you learned no longer apply. While the most important retirement-based IRS rules come into play during your 50s and 70s, in your 60s you must learn about (and try to understand) government programs, such as Social Security and Medicare.

As you shift from accumulation to distribution, volatility becomes trouble. While market turmoil is tough to stomach whether you’re in your working years or retired, those wild swings can actually be beneficial for employees. If you participate in an employer-based retirement plan, you have a forced discipline to buy securities even when the market is down. You are practicing dollar-cost averaging, which, over long periods of time, can help you buy at a lower cost per share. The day you turn on that “income” switch, that volatility exposes you to sequence-of-return risk. In other words, the average return of your investments is not the only factor anymore. When you are living off your investments, the timing of returns is also critical. The earlier in retirement you take a big hit, the worse off you’ll be.

Financing Life After Retirement 

Now that we know we want to reduce volatility as well as sequence-of-return risk, we must think about solutions. Not to sound like a broken record, but the first step is to diversify. Imagine retiring in 2000 with large tech holdings or 2008 with large amounts of real estate. To spread the risk, cut your pie into many pieces.

Once you have a diversified, retirement-appropriate portfolio, you must decide which pieces and how much to sell in order to make your money last. Here are two out-of-date strategies that I wouldn’t fully depend on.

1. Living Off Dividends

Living completely off your dividends is probably unrealistic and irresponsible, unless you are very wealthy. In today’s low-yield environment, you are likely to get a dividend around 2%. If you’re invested 100% in stocks (also irresponsible for many), that means you’ll need a $5 million portfolio to draw $100,000 a year before taxes are taken out. The other risk is that if you are properly diversified, you are drawing only from the stock side, which means the bonds will become too heavily weighted. A better strategy is to sell by rebalancing. Every year decide how much money you will need and sell from the portion of the portfolio that has gone up. This will bring your portfolio back into balance and help you avoid selling at a loss.

2. Using the 4% Rule of Thumb

The 4% rule — often used to determine how much money you withdraw from a retirement account each year — was created for much less healthy people in a much healthier market. The amount you can safely pull out of your portfolio depends on the return you are earning and your life expectancy, which should make you skeptical of any one-size-fits-all strategy.

When to Take Government Retirement Benefits

Now that we have handled the complexities of investing as a retiree, we can dip a toe into the murky, complex waters of government programs. Regardless of your birth year, you can claim Social Security retirement benefits early at age 62. However, you will be permanently penalized for doing so. If your full retirement age is 66 (if you were born in 1943-1954), you will receive 25% less in benefits every month if you claim at 62. The opposite is true if you wait. You will get delayed retirement credits (income increases) of 8% per year until age 70.

The first step to figuring out Social Security is to learn the language (PIA, AIME, DRC, FICA, etc.). Next, find an advocate. Whether they’re a financial planner or not, you need someone sitting on the same side of the table as you when you make the very important decision about when to claim. Lastly, if you’re married, you must plan as a couple. Survivor benefits can be permanently reduced or increased depending on when your spouse claims benefits. Social Security should be simple — in fact, it’s anything but.

It used to be that Social Security’s full retirement age and Medicare eligibility aligned at age 65 and you could knock out both benefit applications at once. However, now you’re eligible to apply for Medicare up to 3 months before you turn 65, and that enrollment period is open for 7 months. You should apply ASAP, at least for Part A, in order for your coverage to begin the first day of the month of your 65th birthday. If you are still working, you’ll need to decide whether it’s worth picking up parts B and D or whether you have adequate, affordable coverage through your employer. Once you retire, you’ll have 8 months to get full Medicare coverage before your premiums are increased by penalties.

While traditional Medicare will likely cover the expenses of many of your medical needs in retirement, it will not cover long-term care expenses, except for short stays in a skilled nursing facility. According to the U.S. Department of Health and Human Services, 70% of those turning 65 will need some type of long-term care (LTC) services during their lifetime. Therefore, it’s a good idea to stress-test your financial plan to help ensure that you can afford a LTC service if needed. If you choose to buy long-term care insurance, you must factor that into your monthly or annual expenses to see if you can afford what are likely to be increasing premiums. If you decide to roll the dice, you want to be sure you have enough in assets and/or income to cover the cost.

Don’t Forget About Taxes

You’ve heard the saying that in life only two things are certain: death and taxes. While we don’t know when the former will come, we know that the tax man comes every year. That’s true even in retirement. The common assumption — and sometimes misconception — is that you will pay less in taxes once you have retired. That is another belief that depends totally on you, where you live and fiscal policy at the time. Your Federal Insurance Contributions Act (FICA) taxes will likely disappear in retirement, but so will many of your work-related deductions, including your 401K, health savings accounts, etc. My advice: Plan conservatively. You don’t want a tax hike in retirement to change your lifestyle.

There are many things to think about as you transition from your working years to your fun retirement years. Planning is advised; rolling the dice is not.

Remember, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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The Sleep Habits of Successful People

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Have you ever wondered about the sleep secrets of wildly successful people? Wonder no more, we’ve got some tips you can start using today. A few simple changes to your sleep routine could help you be more productive, think better and make better decisions.

Sleeping like a champion is nothing to take lightly. A good night’s sleep is key to overall health. If you don’t put in an adequate amount of sheep counting, you could pay for it in the form of heart disease, diabetes, increased cancer risk and even early death. You can’t be productive if you’re dead, so you better get some shut-eye. Here are some sleep habits of highly successful people.

1. They Get Enough Sleep

Most successful people get close to the recommended minimum of seven hours of sleep each night. An analysis by Home Arena of the sleep habits of highly successful people found that 32% got five to six hours of sleep a night. Roughly 27% clocked in six to seven hours of sleep each night.

Getting an adequate amount of sleep is good not only for your body but also your work performance. One of the keys to productivity is having a clear, sharp mind. This is made possible through rest.

2. They Get Uninterrupted Sleep

Getting enough sleep won’t matter much if you keep waking up. If you hope to wake up rested and ready for the day, you’ll want to hang out the “do not disturb” sign. A study by researchers at Johns Hopkins University School of Medicine discovered that short, uninterrupted sleep is more beneficial for you than longer sleep that is met with several interruptions throughout the night. Those who had interrupted sleep were found to be in a worse mood than those who had solid sleep. In addition, study participants who were unable to get a good night’s sleep were at a higher risk for depression. Here’s what lead researcher Patrick Finan had to say:

To our knowledge, this is the first human experimental study to demonstrate that, despite comparable reductions in total sleep time, partial sleep loss from sleep continuity disruption is more detrimental to positive mood than partial sleep loss from delaying bedtime, even when controlling for concomitant increases in negative mood. With these findings, we provide temporal evidence in support of a putative biologic mechanism (slow wave sleep deficit) that could help explain the strong comorbidity between insomnia and depression.

A bad mood could hurt your career success. Not only will a sour attitude hamper your chances of getting a job but it could also affect your overall job satisfaction. So get some sleep so that you can shine at work and snag the best job opportunities.

3. They Get to Bed at a (Relatively) Decent Time

If you’re getting to bed late, you may want to change your ways. Getting to bed earlier can be good for your mental health. You’re better equipped to regulate your emotions if you’re rested. So if you want to prevent angry outbursts at work, you might want to change your bedtime. Another study found that those who go to bed late experience frequent negative thoughts. So go to bed earlier and be happier. Your co-workers will thank you for it.

[Editor’s note: Being on top of your finances can also improve your mood and even help you sleep better at night. If worries about money and paying bills keep you awake, you can start taking control by knowing what’s really in your credit report. You can monitor your financial goals like building good credit for free on Credit.com.]

This article originally appeared on The Cheat Sheet.  

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