April Fools’ Day is fast approaching, so be careful not to fall for pranks and hoaxes across the internet or in real life. While most people can appreciate a harmless practical joke or a zany YouTube video, nobody wants to be careless when it comes to his or her finances.
U.S. News talked to several financial experts about the money pitfalls we should all try to dodge.
[See: 7 Habits You Can Learn From Highly Successful Savers.]
Not taking advantage of an employer match on a 401(k). According to the Bureau of Labor Statistics, 54 percent of civilians participated in employer-sponsored retirement benefits as of March of last year. The majority of employer retirement plans that offer a match require workers to save at least 6 percent to receive the full match, according to Aon Hewitt’s ” 2015 Trends & Experience in DC Plans Report.” Some employers automatically enroll employees at or above the threshold for receiving the match, according to the report.
Unfortunately, not all workers with a 401(k) contribute enough to get the matched contribution, and that’s a big mistake, says John Gajkowski, a certified financial planner and co-founder of Money Managers Financial Group, an Illinois-based independent financial planning firm. “If your work provides a 401(k), contribute at least the maximum amount that will be matched by your employer,” he says. “This is free money that you do not want to leave on the table if at all possible,” he adds.
Withdrawing retirement money prematurely. Most people know they’re not supposed to withdraw retirement funds before age 59 1/2. But there’s a sneaky way that some people unintentionally trigger taxes and penalties by getting a check from a 401(k) or IRA made out to their name and failing to roll it over within 60 days. “Some people get in this situation because their former employer says [taking possession is] the easiest thing to do,” says Hans E. Scheil, certified financial planner, CEO of Cardinal Retirement Planning, Inc. in Raleigh, North Carolina, and author of “The Complete Cardinal Guide to Planning for and Living in Retirement.”
If workers wind up needing the money for something else or simply forget to make the roll over, they’re in trouble. “The rule is complicated and the IRS is unforgiving,” Scheil says. The most foolproof way to roll over a 401(k) or an IRA is to do a custodian-to-custodian transfer and never touch the money yourself, he adds.
[See: 10 Tips to Boost Your IRA Balance.]
Forgetting to update beneficiaries. Whenever there’s a marriage, death, divorce or change of heart, be sure to update the beneficiaries on your life insurance, annuities or retirement accounts to reflect your wishes. Otherwise, you could pass away and your family might “find out the beneficiary wasn’t done properly,” Scheil cautions. That could result in your life insurance money going to an ex-spouse, leaving your surviving spouse high and dry, or assets could get tied up in probate court before they flow to your heirs.
Ignoring recurring payments. Nowadays, with subscription services for everything from makeup to meal delivery kits to automated payments on gym membership to streaming services, it’s all too easy to set and forget recurring payments. Clients rationalize this behavior because “it’s just $10 a month or it’s just $15 a month,” says Shannon McLay, a financial planner and founder and president of The Financial Gym, LLC in New York City.
Over time, though, those small monthly payments really add up, and in some cases McLay says her clients are so busy they aren’t even opening the boxes they get from these services. Dedicate a few minutes per week or per month to scrutinize bills and bank statements to make sure you’re not paying for services you don’t use or overpaying for services that you do use.
Prioritizing the wrong debts. Some people are so laser-focused on paying off one kind of debt that they wind up paying much more overall. “I see a lot of clients tackling student loan debt because it’s uncomfortable,” McLay says. “They don’t have a proper emergency savings account and they get into credit card trouble, [which] typically comes at a 15 to 20 percent cost versus student loan debt at 6 percent,” she adds.
McLay encourages clients to have six months of living expenses stashed in an emergency fund, even as they’re paying off debts. If that’s too overwhelming, then start with $1,000. “Whether it’s a health care emergency, a car situation or family situation, $1,000 events happen all the time,” McLay adds.
[See: 8 Big Budgeting Blunders — and How to Fix Them.]
Most foolish money missteps boil down to this central problem: lack of awareness and planning. “The biggest mistake people make is they’re reactive with money rather than proactive,” Gajkowski says. “They’re constantly putting out fires rather than having a philosophy or plan on where their money’s going to go.”
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