Stay out of financial trouble by identifying mistakes

Monday, January 5, 2004

NEW YORK -- We all make mistakes with our money, but identifying those mistakes can be the first step toward correcting them.

Here are some ways experts believe consumers go wrong -- and their advice for staying out of trouble:

Savings

Don M. Blandin, president of the nonprofit American Savings Education Council in Washington, D.C., believes the biggest mistake workers make is cashing in their 401(k) retirement accounts when they change employers.

"They take the money and run every time they change jobs," he said. "They spend it, and end up paying penalties and taxes."

The right thing to do, he said, is to roll that money into an Individual Retirement Account or your next employer's 401(k) "so it keeps earning interest and growing for you." Letting go of the money "eats away at your retirement security," he said.

Blandin also said Americans who haven't saved a lot shouldn't give up on savings as a goal.

"I didn't start early, and I didn't save enough," he admitted. "But I put that behind me and I was able to catch up, and so can those who set their mind to it."

Debt

"The easy credit, particularly of the past few years, encourages people to borrow without considering their ability to repay or how long it will take to repay," said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla.

A debt consolidation loan is one way to deal with debts, he said, "but not if it isn't followed by an effort to refrain from incurring additional debt."

The same holds true for paying down debt with a home equity loan or a cash-out mortgage refinancing, he added.

"If people don't take care, they can dig themselves into an even deeper hole," he said. "Now you've leveraged your home and perhaps put yourself in a more precarious position."

A better approach, he said, is to hold debt in check. Start by comparison shopping for credit cards and loans with the best terms -- and remaining aware of how much debt you can comfortably handle, McBride said.

Divesting

Lynnette Khalfani, author of the newly published "Investing Success: How to Conquer 30 Costly Mistakes & Multiply Your Wealth," has some advice for consumers who invest in stocks and mutual funds: Don't buy unless you have a sell strategy.

"A lot of times people can give you 15 reasons why they should buy a stock or a fund," she noted. "But they can't tell you why they should sell or when they should sell."

The result, she said, is that fear and greed can take over -- neither of which is a good reason to act on an investment.

She said investors should determine up front what will prompt them to sell. The triggers could include a change in management, a slowdown in a company's growth, a rise in the share price of 10 percent or 20 percent. But there's evidence that consumer don't do this, she added.

"Look at the nice run-up we've had this year," she said. "But people have completely forgotten about any sell strategy and haven't booked those profits."

Insurance

Most Americans are underinsured and don't know it, said David F. Woods, president of the nonprofit Life and Health Insurance Foundation for Education in Washington, D.C.

"People don't do a proper analysis of how much insurance they need," he said. They assume that because their employer gives them two times their salary in life insurance, or because when they bought the house they got insurance for the mortgage, they're covered, he said.

The test is when a disaster occurs, he said. "If something happens, there will be something there -- but probably not nearly enough."

He suggests consumers sit down with a financial adviser or insurance agent every couple of years -- or at least when there's a life-changing event, like the birth of a child -- to evaluate their coverage.

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