A recent article by Lisa Scherzer, of the Exchange on Yahoo finance, highlights 5 key mistakes to avoid making with your money. She talks about how these mistakes can be made everywhere along the budget line, at grocery stores, the bank, the housing market, the stock market, even family expenses like allowances for children supplementing adult children’s income (an issue facing many baby-boomers who are now shifting their financial focus to retirement income). Here 5 of the worst things that can be done:
1) Spending an unexpected windfall – 2/3rds of baby-boomers will receive some sort of inheritance, at median amount of $64,000 and most are unprepared to plan for the use of this unexpected influx of money. Many spend it as it feels as if they have enough to cover everything, when in fact the ideal move could be using it to generate an income stream for retirement.
2) Cashing out a 401K when you leave a job – 43% of workers who left their job in 2012 took a cash distribution from their 401K account. The consensus of most advisors is to roll it into an IRA, for those who are comfortable making investment decisions and know how to properly allocate their funds, the IRA is the ideal avenue to take.
3) Stopping contributions to your 401(k) plan when the market or your account drops – Remember the stock market isn’t stagnant and by stopping participation in the 401K account you are still giving up the “free money” from employment matching (assuming the employer is matching contributions).
4) Falling victim to lifestyle inflation – avoid increases in permanent expenses simply due to an increase in income. Just because the income level goes up doesn’t mean the budget for everything. Lisa says that a splurge is fine, but to avoid adding too many expense increases like new apartment/home with higher living costs.
5) Using home equity to invest in the stock market – Many people think that since home loan rates are so low wouldn’t it make since to pull out that equity and have it go to work for you? The answer is that at this moment the market is in a run of multi-year highs, usually a bad time to enter the market.
To read the article by Lisa Scherzer, click here.