Four big money mistakes to avoid

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, $2000, 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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Your Budget Solution? The Envelope Please . . .

What do you want to be when you grow up? A common response is, “I don’t want to grow up.” Well, Tinkerbell, it’s time to wake up. Peter Pan only lives in Disney movies and in the imagination of small children.

It’s time to grow up, whether you want to or not. You’re an adult. You now belong to the YOYO world – You’re On Your Own. Your mommy isn’t going to take care of you forever. The democrats aren’t going to take care of you – even though they’ll try because they think we’re all helpless idiots.

Here’s another question: What do you want to be when you grow old? If you don’t take care of your money, and plan for the future, your retirement years will be filled with countless hours on your feet saying, “Welcome to Walmart” about 1,000 times a day.

The first step to fiscal responsibility (there’s that “R” word again) is to make the most of the money you make. You likely have a pile of bills that need to be paid. It’s also likely that, from month to month, you’re not sure if there is enough to pay all those bills.

Prioritize Your Bills

The idea is to prioritize how you spend the money you have coming in. You’ll need to sit down with your better half and create a budget. What is most important? -- shelter, utilities, groceries and health. If there’s anything left after you’ve paid these bills, then perhaps you can take care of some other obligations.

A very effective method of creating, and sticking to, a budget is the “envelope” method. Take a handful of #10 business size envelopes and label each envelope for each priority. As the money comes in, put the exact amount of money going toward the mortgage in the envelope labeled “mortgage.” Do the same for utilities, groceries, transportation, etc. This isn’t rocket science.

What It Takes

With limited funds coming into the household, you have to cut back on spending to make ends meet. Sacrifices have to be made. It may be painful, but you don’t really have a choice. It will take commitment; a sense of awareness and a large dose of self-discipline. It will come from deep inside. You’re not going to develop these qualities from watching a few hours of Dr. Phil.

No cheating! There’s no stealing money from the “groceries” envelope to take the family to the Beavis and Butthead Theme Park. No stealing money from the “mortgage” envelope to buy that win ticket on Woe Is Me in the fourth race at Belmont.

You’ll need to say “NO” to eating out, “NO” to vacations, “NO” to watching QVC at 3 a.m., “NO” to those lap dances, and “NO” to everything else that doesn’t address your priorities.

If you have anything left, after taking care of the survival essentials, you’re doing pretty well. You can begin to deal with other financial clouds that may be hovering over your life. Your first objective should be to pay down the balance on your highest interest credit card. That’s costing you a fortune in interest every month. Hopefully, you’ve already explored the possibility of moving your credit card debt to one of those Zero or low-interest cards. I’ve seen people juggle their debt for a year or more by moving it around from company to company. Be careful, though. Always read the fine print on those offers. Also, be very wary of those hustling debt consolidation.

The “envelope” method is simple and straightforward. If you do have money left over, sock it away. You should be building up an emergency fund of three to six months of living expenses. In life, mierde happens. Count on it. And it will happen at the least convenient time. You have to be prepared to clean it up and paper towels won’t help. To use a football analogy, you can’t play offense without the ball. Until then, you need to play solid defense.

Obama just gave a speech acknowledging how we, as a country, have to cut back on Federal spending. He just projected a budget for 2010 of $3.55 trillion. That’s more zeroes than I can comprehend. He’s going to need more than envelopes to make this work. He’ll need a genie and all three wishes.

Obama went on to outline in how he plans to cut spending by a whopping $17 billion. Tons of cuts will have to be made. Sounds like a lot, right? It sure did to me. Then I got out my calculator. The $17 billion amounts to less than one half of one percent of the $3.55 trillion budget. It’s like a fly on an elephant’s butt. Who is he kidding?

About 100 days into his presidential term, Obama desperately wants to be a hero. He promised change. Keep in mind that this is the same guy who didn’t blink an eye at spending a reported $170 million for his inauguration. It seems like that might have been a good place to start, if he was serious.

Some hero. It’s pretty clear that our kids and our kid’s kids will be paying taxes to cover his spending programs for generations to come. I hope I’m wrong. Folks, it might be a very long four years.

However, you can be a hero in your own household. The changes don’t have to be as dramatic. Take a deep breath, buy a box of envelopes and give it a shot. You can do it.

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