Podcast: 5 Money Management Horror Stories
Creepy-crawlies and things that go bump in the night are fun on Halloween but not for your money. I'm all about scary movies, but when the horror involves my bank account or investments, that calls for a blood-curdling scream.
As a financial advisor for 16 years, I witnessed too many horror stories to count. People with no insurance. People drowning in credit card debt. Financial problems ripping families apart. They're not fun. My job was to help these nice people find a way out of the darkness.
When my children were young and afraid of the dark I'd shine a light into the closet. Sometimes I'd leave on a night light. I'd dispel the gruesome horrors as an advisor, too. It's easy: Start talking about them, and create a plan before they become problems.
Here are five big financial horrors and easy ways to exorcise them:
No direct deposit. If you trust yourself with money in your wallet, you're asking for trouble. It's too easy to spend money if it's available. Instead, set up systems to automatically filter rainy day money into separate accounts and an envelope system to make sure there's enough to cover all the bills. Using this simple system, you'll have both guilt-free spending and worry-free investing. As a bonus, you'll avoid potentially ugly check-cashing fees.
No direct investment. If you don't begin automatic investing, this can feel like that horror movie where one of the victims takes forever to die. You'll slowly realize that you've missed out on compounding interest, and it will become more and more difficult to reach your goals. Automatic investing is wonderful for one reason: You never see the cash. Most of my successful clients set up easy systems so money funneled to the right places without them thinking about it. Find a good mutual fund or exchange-traded fund that matches your goal and use either direct deposit or automatic withdrawals from your bank account to make investing painless. Score a raise at work? Save it into your company retirement plan before you see it.
Not understanding tax withholding. There are two big points victims in the tax horror story don't understand: First, tax refunds aren't windfalls -- they are your money; second, a pretax retirement plan at work like a 401(k) or 403(b), even with some fairly high fees, usually beats a nonqualified investment when it comes to retirement savings. Use tax refunds to pay down debt or invest. Use retirement plans to lower the tax bill you owe.
No spending plan. Ever hear of the rat race? You'll be living the rat race like a hamster on a wheel, spinning faster and faster if you don't pay attention. That's a horror story: You're caught on the wheel working harder and getting nowhere. What's the solution? Divorce your paycheck from your spending. The wage you earn doesn't have to be the amount you spend.
And this last financial horror story actually happened. Sadly, this is one former client relationship I wish I could have saved. A client nearing retirement watched CNBC nearly every day as the market fell. I consistently reiterated that the investment plan we worked on together would weather the storm, and he had plenty of money elsewhere to wait for a recovery. Sadly, the television won: He decided to move his money from the financial markets and buy a CD, while down over 25 percent.
It still hurts that I couldn't talk him out of taking his money out of the market, but that's not the story. (That would have been horrible enough.) As the market hit bottom, he not only took his funds out of the stock market -- he took it all out of his IRA! No matter how many websites I sent him to, including the IRS, he didn't believe he could buy a CD inside of an IRA. Here's what happened: Not only did he lock in 25 percent losses (that would have repaired themselves within a few years), he ended up paying taxes as if he earned the money right then. Taxes on top of losses ... talk about a horror story.
I'll stick with scary movies. With a little planning and some determination, you can also avoid most of the potential horror stories with your money. And the few that you can't, you'll have a plan to work through them.
Joe Saul-Sehy is the co-host of the award-winning Stacking Benjamins podcast, which focuses on earning, saving and spending with a plan.
