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Are You Fooling Yourself When It Comes to Money?

Key Points
  • It's easy to rationalize money mistakes.

  • From overspending to undersaving, here are 10 common ways we can fool ourselves right into a financial bind.

  • This April Fools' Day make sure the joke isn't on you when it comes to your money.

Dear Readers,                                                

April Fools' Day is usually about playing pranks on someone else. It's fun, harmless and good for a laugh. But when it comes to money, some folks have a way of fooling themselves into believing they're on top of things—only to discover later that it’s 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 you're cutting yourself some slack. Here are some common rationalizations that can drive you right into a financial bind—and then it's no laughing matter.

1) I don't need a budget

Whether it's 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, it's 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 doesn't keep you from spending, it helps you to spend mindfully and live within your means.

2) An emergency won't 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 you're not prepared. If you don’t 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 months’ necessary expenses.

3) If I'm short on cash, I can always use credit

Credit can be fine and certainly convenient—if you use it wisely. It's when you carry too much "bad” debt—like credit cards and other high-interest, non-deductible consumer debt—that you have a problem. The answer? Don't charge more than you can pay off each month. Create a plan to pay down current balances. You’ll 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, "good” debt, things like your mortgage or student loans, can be a smart choice—provided you manage them wisely.

4) Retirement is a long way off

Even if retirement is far in the future, it's the shrewd saver who starts planning for it now. The earlier you begin, the less you'll have to set aside each year. Have a 401(k)? Contribute at least enough to get the largest possible company match (that's free money!) and much more if you can. Put all your contributions on automatic, and you'll 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 you're least able to pay. As you review your insurance options, take full advantage of all your employee benefits—from health to disability to life insurance—no matter how old you are.

6) I've got a sixth sense about investing

Letting emotion—or intuition—steer your stock choices is the very opposite of wise investing. There's 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 don't wait for your sixth sense to tell you what to do. Come up with a plan, get in the market—and 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 longer—until 70—your 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 don't 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 don't need any help

No matter how savvy you are, when it comes to your financial future—especially retirement—it's 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 doesn't care about the details

Even if you generally take the lead, it's 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, it's time to do some rethinking. This April Fools' Day, take a look at your finances and make sure the joke's not on you.

 

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risk including loss of principal.

(0319-92CG)

 

The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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