Are You Falling for These Financial Tricks?

Dear Readers,

It’s the rare person who doesn’t occasionally fall into some poor financial habits that can lead to potentially scary results. This Halloween, make sure you’re not tricking yourself into a financial bind. Rather, treat yourself to greater security by reviewing these 10 personal finance “gotchas” and making any necessary changes. The results can be better than chocolate!

1) Trick: Assuming your money is going where you want it to go

You’re making ends meet, so you’re on top of your money—right? Maybe not. Money has a sneaky way of slipping away if you’re not careful.

Treat: Instead of making assumptions, make a budget. Start with two lists: your necessary monthly expenses and your nice-to-haves. Can you cover both with your income? If not, get out the red pen and start crossing off some of the extras. You don’t have to give them up completely; just save in advance. Then when you want to treat yourself, you’ll enjoy it even more knowing you’ve got it covered.

2) Trick: Thinking a financial emergency won’t happen to you

Unexpected expenses can creep up on you, even if you’re young and healthy. A job loss? An accident? It may not happen, but it could—and it could cost you big time if you’re not prepared.

Treat: Build an emergency fund. Aim to cover three-to-six months of essential living expenses by setting aside cash in an easily accessible savings or money market account. You don’t have to do it all at once. Just make your emergency fund a line item on your budget, and save what you can each month until you reach your goal.

3) Trick: Confusing good and bad debt

Debt—like a mortgage or a student loan that’s low interest, possibly tax-deductible, and used for a potentially appreciating asset—can actually work in your favor. That’s the good kind. Credit cards and other high-interest, non-deductible consumer debt? Even though it’s convenient, that definitely falls into the “bad” category.

Treat: Don’t charge more on your credit cards than you can pay off each month. Create a plan to tackle any balances. Start by paying as much as you can on the highest interest debt while always making at least minimum payments on the others. Work your way down until your credit card balances are paid off—and stay that way.

4) Trick: Not checking your credit score

A low credit score can have serious repercussions, from higher interest rates and points on a loan to impacting your ability to rent an apartment—or even get a job.

Treat: Go to annualcreditreport.com once a year to get a free credit report from each of the three major credit bureaus (Equifax, Experian, and Transunion). If you’re in the low zone, there are positive steps you can take: pay your bills on time; keep your credit card balances low; establish a long credit history; minimize new credit requests; or use different types of credit.

5) Trick: Losing track of bank fees

ATM fees, account fees, foreign transaction fees—they can definitely catch you unaware. And they can add up quickly.

Treat: Review your statements so you know exactly what you’re being charged. If you’re unpleasantly surprised by the fees you’re paying, talk to your bank. Still unhappy? Change banks. There are many no-fee options out there.

6) Trick: Being complacent about retirement savings

Don’t assume you’re okay just because you’re putting some money aside. With more people living into their 90s, there’s a real risk of outliving your money if you’re not prepared.

Treat: Crunch the numbers so you’re sure you’ll have the nest egg you want. If you’re contributing to a 401(k), great—but it may not be enough. Use an online retirement calculator to help you figure out timing and how much to save each month. Get started early. And give yourself an extra edge by putting all your contributions on automatic. Need more help with number crunching? Consider working with a professional advisor to develop a personalized plan.

7) Trick: Under or over insuring

Saving on premiums may seem smart now, but what’s the ultimate cost if you don’t have enough insurance when you need it? On the other hand, if you’re paying for insurance you don’t need, you’re also losing out.

Treat: Check to make sure your coverage and plans for medical, auto, homeowners/rental, or disability insurance are still right for you. Be sure to take full advantage of all your employee benefits. And don’t be lured into buying unnecessary insurance for risks that you can handle more cost-effectively on your own (for example, pet insurance with lots of exclusions and high deductibles).

8) Trick: Confusing saving and investing

Just because you have money in a 401(k) doesn’t mean that it’s invested. You have to take action to make your money grow.

Treat: Long-term investing in the stock market is one of the best ways to grow your savings. The key is to invest in a diversified mix of stocks, bonds, and cash that are appropriate for your time frame and feelings about risk—and never try to time the market or bet on a single stock. A 401(k) that offers target date retirement funds is one easy way to get started.

9) Trick: Taking Social Security too early

You can file for Social Security as early as age 62, but that doesn’t mean it’s the best choice for you. In fact, it could mean you’ll collect considerably less over time.

Treat: Don’t jump to collect Social Security benefits earlier than you have to. If you file before what the SSA considers your full retirement age (FRA), your benefits will be permanently reduced. And for every year you wait past your FRA until age 70, you’ll get an 8% increase. That can make a huge difference, especially if you enjoy a long life.

10) Trick: Ignoring your estate plan

You may have an estate plan in place, but when was the last time you looked at it? And if you don’t have one already, the trick could be not only on you but also on your heirs.

Treat: Set up at least a basic estate plan, including naming a guardian for any minor children and an advance healthcare directive. Once you have a plan in place, be sure to review and update it periodically to reflect any significant life changes such as marriage, divorce, or additions to the family.

Unlike Halloween candy, these financial treats aren’t just a one-time indulgence. They can set you up with a sweet financial situation to savor for years to come. Happy Halloween!

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.