April Foolsâ Day is usually about playing pranks on someone else. Itâs fun, harmless and good for a laugh. But when it comes to money, some folks have a way of fooling themselves into believing theyâre on top of thingsâonly to discover later that itâs not the case.
So this April 1st, I want to turn the tables and ask you a serious question: Are you being honest with yourself about your finances? You may think so, but I bet there are a few areas where youâre cutting yourself some slack. Here are some common rationalizations that can drive you right into a financial bindâand then itâs no laughing matter.
1) I donât need a budget
Whether itâs formal or informal, having a budget simply means you know how much money you have to spend and how you want to spend it. Plus, itâs easy to create. Just list your necessary monthly expenses (including savings) and make sure you have enough income to cover it all before you add on the nice-to-haves. A budget doesnât keep you from spending, it helps you to spend mindfully and live within your means.
2) An emergency wonât happen to me
You may be lucky enough to never face a major disaster, but even a small, unexpected expense can spell financial trouble if youâre not prepared. If you donât yet have an emergency fund, start by directing $100 per month into a savings account until you have enough to cover a minimum of three monthsâ necessary expenses.
3) If Iâm short on cash, I can always use credit
Credit can be fine and certainly convenientâif you use it wisely. Itâs when you carry too much âbadâ debtâlike credit cards and other high-interest, non-deductible consumer debtâthat you have a problem. The answer? Donât charge more than you can pay off each month. Create a plan to pay down current balances. Youâll save the most interest and pay off debts faster by focusing first on the highest interest debt (making at least minimum payments on the others) then working your way down until all are paid off. On the other hand, âgoodâ debt, things like your mortgage or student loans, can be a smart choiceâprovided you manage them wisely.
4) Retirement is a long way off
Even if retirement is far in the future, itâs the shrewd saver who starts planning for it now. The earlier you begin, the less youâll have to set aside each year. Have a 401(k)? Contribute at least enough to get the largest possible company match (thatâs free money!) and much more if you can. Put all your contributions on automatic, and youâll be congratulating yourself on how smart you are come retirement time.
5) I can live without insurance
However you might rationalize it, short-term savings on insurance premiums could end up costing you in the long run. Not having enough medical, auto, homeowners/rental or disability insurance could mean big bills when youâre least able to pay. As you review your insurance options, take full advantage of all your employee benefitsâfrom health to disability to life insuranceâno matter how old you are.
6) Iâve got a sixth sense about investing
Letting emotionâor intuitionâsteer your stock choices is the very opposite of wise investing. Thereâs no way to time the market, and betting on a single stock is risky at best. The key is to invest in a diversified mix of investments that together will add up to a portfolio that is appropriate for your time frame, ability to take risk, and feelings about risk. And long-term investing in the stock market is still one of the best ways to grow your money. So donât wait for your sixth sense to tell you what to do. Come up with a plan, get in the marketâand stay in.
7) I should take Social Security as soon as I can
That could be the right choice for you, but most people will do better by waiting. So run the numbers. If you collect at age 62 your benefit is permanently reduced by about 25 to 30 percent of what it would be at your full retirement age. If you wait even longerâuntil 70âyour benefit will grow about 8 percent per year. That difference can add up to a considerable amount of money, especially if you enjoy a long life.
8) Estate planning is only for the wealthy
You donât have to be wealthy to at least put the basics in place: a will that states how you would like your assets distributed and that also names a guardian for any minor children, powers of attorney for financial and medical decisions, and an advance healthcare directive that outlines the type of end of life care you want should you become incapacitated. Beyond that, your estate plan will depend on the complexity of your financial situation.
9) I donât need any help
No matter how savvy you are, when it comes to your financial futureâespecially retirementâitâs good to get a second opinion. Talking to a financial advisor, at least occasionally, can give you a more realistic picture of where you are and the plans you need to put in place.
10) My family doesnât care about the details
Even if you generally take the lead, itâs important that your spouse or partner understands your finances and participates in all major decisions. And when it comes to estate planning, your adult children would definitely want to know what to expect.
If you see yourself in any of these statements, itâs time to do some rethinking. This April Foolsâ Day, take a look at your finances and make sure the jokeâs not on you.
Have a personal finance question? Email us atÂ [emailÂ protected].Â Carrie cannot respond to questions directly, but your topic may be considered for a future article.Â For more updates, follow Carrie on LinkedIn, Twitter and Facebook.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Investing involves risk including loss of principal.
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