NEW YORK — “I’m OK as long as there’s money left at the end of the month,” is not a long-term financial strategy.
It may be tempting to believe that setting aside what little extra is left is all that’s necessary. But the truth is that a well-devised plan is the surest way to make dreams become reality.
And that holds true at any age, whether your dreams involve traveling the world, starting a business or being able to put kids through college without compromising your retirement.
Financial decisions often are based on false assumptions; such as financial planning is only for the wealthy, investing requires lots of cash, or Medicare will cover all of your health care expenses as a senior. Beginning today, in a week-long series, The Associated Press will debunk many of the myths that stall progress and complicate money matters from early-career through retirement.
The first step toward achieving any financial goal is being fully aware of what happens to your money.
“It’s hard to get to your destination if you don’t know the route you’re taking,” says Bruce McClary of Clearpoint Credit Counseling Solutions.
Yet financial professionals say they’re continually surprised by their clients; both by how often even successful professionals are unable to explain where the cash from each ATM withdrawal goes, and their resistance to crafting a simple spending plan.
“There is that association between budgeting and pain,” McClary says. The initial steps of the process can be frustrating, but after the fist-banging and head-scratching, a plan will emerge that makes life less stressful and provides a clearer path to reaching goals. “And that’s anything but pain.”
A budget is just the initial part of a financial plan, but it’s certainly not the only one that comes with its own set of misguided beliefs. Here are a few other misconceptions that can jeopardize your future:
Regular folks are on their own.
One popular myth is that financial planners work only with wealthy investors. In fact, planners focus on more than the stock market and help a range of clients. That includes assisting those just starting their careers map out a detailed plan for the future. And the earlier a plan is crafted, the better chance it will succeed. Waiting until a few years before retirement is a common mistake that can be akin to setting yourself up for failure, says Gordon Tudor of Wealth Analytics in San Diego.
Watch out, however, for anyone claiming to work for free and who at the same time is selling investments or insurance. “If the adviser isn’t charging you separately for the financial plan, then it isn’t a financial plan,” says Cass Chappell, a financial planner at Chappell Mayfield in Atlanta. He stresses that planning incorporates more than investing. It also involves strategies for buying a home, paying for college, meeting insurance needs, saving for retirement and handling estate planning.
If you can’t afford a planner right away, you can start by getting help on budgeting from a nonprofit credit counseling center.
There’s no room to save.
The regular flow of monthly bills may make it seem like every dollar earned is already spoken for. How can you possibly save?
Recognize that if you don’t, you’ll pay a price. Skip making contributions to a 401(k) retirement plan and you’ll be that much poorer in the future. And you’re only shortchanging yourself more if you fail to collect a company match. What’s more, if you’re not saving some of your paycheck, you’ll likely find a credit card in hand every time an unexpected expense pops up.
So even if it’s just $25 a week to start, Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif., urges her clients to save. Money that’s not set aside will inevitably be spent, so it’s important to move some cash to savings.
“I guarantee you won’t miss it after the second month,” she says, adding it’s best to make saving as automatic as possible. Regular transfers to an online bank account, for instance, will make raiding your savings for a spur-of-the-moment dinner out less likely. Odds are you’ll receive a better interest rate as well.
Debt is a natural part of life.
Carrying a heavy debt burden is certainly common, but treating it as the normal way to manage money can create a negative cycle that lasts for years.
It may start with the idea that a credit card balance is so high, one more charge won’t make a difference; or that the budget is so tight, the only way to have some fun is to put it on plastic.
During the housing boom, the next step often involved paying off card balances with a home equity line of credit. But the debt cycle frequently continued, credit cards were run up again and the homeowner ended up with twice the debt. Add a car loan and the burden can be overwhelming.
The truth is carrying a heavy debt load reflects a habit of poor spending choices and insufficient planning. It’s not a necessary evil. Ann Koplin, director of retirement income marketing at Thrivent Financial in Minneapolis sees this habit as particularly common among recent college graduates. They often burden themselves with large credit card balances and hefty interest rates for years. Her advice: find a way to pay off credit cards as soon as possible. Another smart step is to keep borrowing to a minimum by setting aside “payments” before you need a new car or make another major purchase.
A fat tax refund is free money.
Receiving a big check from the Internal Revenue Service may seem like a windfall, but it’s really a sign of poor planning. The average refund last year topped $3,000. A refund that large may mean too much is withheld from your paycheck. Instead, that money could have been put to work shoring up an emergency fund or fueling an Individual Retirement Account.
Even worse is blowing through a refund frivolously, especially if you have paltry savings or lingering credit card balances. That misstep only compounds the miscalculation and misses the opportunity to make the best of a withholding mistake.