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Archive for Monday, November 9, 2009

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4 big money mistakes you should avoid

November 9, 2009

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Who hasn’t made a financial mistake or two in their life? For some of us it was more than an occasional late fee or random urge to overspend that brought us to our financial knees.

Whether you’re recovering from a season of unemployment or from a financial mess you created on your own, avoid the goofs and get where you want to go much faster. Woman’s Day offers some mistakes to avoid and solutions to the issues:

1. Not saving: You’ve heard this plenty, and here it comes again: Jump to the front of the line ahead of your creditors when you divvy up your paycheck. Get over feeling guilty about keeping money for yourself. You need a fat emergency fund, and the only way to build it to pay yourself first. Stuff happens and if you’re not financially prepared for those emergencies, you’ll keep falling back into debt.

Solution: Put your saving on autopilot you won’t miss what you don’t see. Commit to saving 10 percent of every paycheck. If you can’t start there, start with 2 percent. Then in a few weeks, change it 5 percent, then 7 and so forth, until you reach at least 10 percent.

2. Paying for college: If you must make a choice between adequately funding your own retirement and paying for your kids’ college education, put retirement first. Contributing to college funds, going into debt by cosigning for student loans or taking out a home equity loan to cover tuition before you’ve taken care of your own future are huge blunders. The best gift you can give your kids is to make sure you won’t become a financial burden to them in your sunset years.

Solution: Kids have far more options for funding their college education than you have for your retirement. They’ve got scholarships, grants, financial aid, student loans, work-study programs and the not-to-be-forgotten method of working their way through college. Once your own future is secure and you’re out of debt, that’s when you’re in a position to help pay for education. Use the free retirement calculator at moneycentral.msn.com/retire/planner.aspx to determine how much you need to be setting aside for retirement each month.

3. Refinancing a fixed-rate mortgage: With mortgage rates at a 50-year low, it’s tempting to refinance to get a lower monthly payment. But before you do that, ask yourself this: Can you take the difference between the payment you have now and the lower payment and use it to repay all your financing costs within 24 months? The average closing cost is 2.5 to 5 percent on a $150,000 loan ($3,750) to $7,500), but the percentage usually goes down as the loan increases. Divide the amount you’ll save each month in to the closing cost. If the result is more than 24, you’ll be making a big mistake by refinancing. Even worse, refinancing with this lower monthly payment will reset the clock, putting you back on a 30-year payback schedule. Your goal should be to pay off the home so you own it free and clear before you retire. If you’re 10 years from paying off your home and you refinance to get a lower monthly payment but you end up with a 30-year term, you’ll be making those new “lower” payments for an additional 20 years! If the payment is, say, $2,000, you’ll end up paying an additional $480,000 just because you refinanced and reset the clock.

Solution: If you do the math and it works out in your favor, go ahead and refinance but keep making the original, larger mortgage payments you’ve been making all along. Now, that lower payment will make an authentic, financially wise difference. You’ve managed to outsmart that reset clock and the extra interest that comes with it.

4. Debt consolidation: Sounds great, but more often than not, that’s a big faux pas. Low-rate consolidation loans are typically tied to something of value like your home’s equity. Bad enough, but here’s the real problem: The financially immature person gets the equity loan and then keeps using those credit cards. In no time, the balances creep back to the limit. And that means double trouble.

Solution: Forget about consolidating old debt into new debt. Instead, get serious about cutting your spending so you can pay off the debts you have as quickly as possible. If you have a good payment history, call the creditor and ask for a lower interest rate. You never know — you just might get it!

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