Friday, November 5, 2010
Money management is not something that most of us learn in school. If we’re lucky, our parents set a good example and help to put us on a sensible financial path, but mostly we just have to wing it and learn our financial lessons the hard way. This is unfortunate for several reasons. For one thing, you can get in pretty far over your head before you realize you’ve made a huge mistake, and it can cost you big (foreclosure, poor credit score, bankruptcy, etc.). It can also lead to a failure to adequately protect the wealth you have as well as causing problems for your loved ones (ruining your own finances is one thing, but dragging your family down with you is another). In short, the inability to budget, maximize earnings, and protect assets could leave you drowning in debt. Here are a few common blunders that could put you in the poorhouse, and how to avoid them.
Overspending. Living beyond your means may be in vogue, but it’s never a good idea. Budgeting is really just as simple as comparing what you earn with what you spend and ensuring that the former is larger than the latter. If you’re having trouble controlling your spending, simplify by cutting up your credit cards, paring down your expenses, and paying everything with cash (or money orders). This way you absolutely can’t spend more than you have.
Sharing accounts. When one hand doesn’t know what the other hand is doing, it can cause major problems in a joint checking account or credit card (not to mention a marriage). Save your money (and your relationship) by keeping separate accounts. Split bills according to earnings and whatever each person has left is their own fun money (which can be pooled later for joint activities and such).
A poor credit rating. Neglecting your credit score is a good way to ensure that everything costs you more. A top tier credit rating can net you lower interest rates on big purchases (home, cars, etc.), which will save you a lot in the long run.
Inadequate insurance. You really should obtain insurance for anything of value. Homes, in particular, tend to increase in value over time, so make sure you stay up to date with appraisals for insurance purposes. You don’t want to suffer the loss of a home only to find that it’s insured for half its current value. And make sure to keep a record (photo or other) of big-ticket items (for electronics, you should have the serial number, and jewelry requires a certificate of appraisal) in case of theft or damage.
Putting your eggs in one basket. It can be tempting to invest in hot stocks to make a quick buck, or opt only for super-safe, low-yield securities, but you will be much better served to spread your money around when it comes to investing. If one area isn’t paying off, another is bound to. This way, you’re always earning something and a major loss in one area won’t totally bankrupt you.
No savings. While you can certainly earn more on your money in other ways, you may be glad to have some liquid assets readily available in certain situations. Financial planners advise a minimum of three months’ worth of expenses be saved in the event of job loss.
No will. Part of protecting your wealth is ensuring that it is passed on properly in case of your untimely demise. Unless you want the government to take it all, or for assets to get eaten up by lawyers as a result of disputes, you should definitely take the time to forge a last will and testament, as well as update it periodically.
Kyle Simpson writes for Purchase Order Financing where your dreams of funding a major business opportunity can become a reality.