15 Dumb Money Moves

Sometimes the smartest move is the one you don’t make. Here are some of the dumbest things you could do with your money. And no one wants that.

1.)    Putting all your eggs in company stock

If the business falters, your retirement plan could fall off along with it. Limit company stock to 10 percent of your portfolio.

 

A smart alternative: Own some foreign stocks

Diversify your portfolio beyond our shores and you’ll reduce risk and have a shot at higher returns. Put at least 20 percent of your money overseas.

2.)    Cashing out your 401(k)

Leave your 401(k) alone when you leave your job. If you cash out, not only will you pay a 10 percent penalty and income taxes, but you’ll also lose out on future tax-free growth.

 

A smart alternative: Max out your saving

Put as much as you possibly can into your 401(k). Assuming a 7 percent return and a 50 percent match, upping your annual contribution by one grand and keeping that up for 30 years will fatten your nest egg by $153,110.

3.)    Buying an investment you don’t understand

To know if it makes sense for you, you have to make sense of it. Ask your broker, planner or agent questions, and if the answers aren’t clear, move on.

A smart alternative: Buy large-cap growth stocks

“They’re the cheapest that I’ve seen them, compared with bonds, since 1981,” says Tom Marsico, manager of two top-performing large-cap funds, Marsico Growth and Marsico Focus.

4.)    Not checking out your advisor

Don’t hire a planner or adviser without asking how you’re paying for the advice. And how much. How else can you figure out whether the advice is worth the price?

 

A smart alternative: Have a financial plan

Hire a financial planner to review your retirement and college savings plans. At garrettplanningnetwork.com and myfinancialadvice.com, you’ll find planners who work by the hour (usually $150 to $200 per).

 

5.)    Retirement plan folly

Saving for your children’s college education at the expense of fully funding your 401(k) is a bad choice. Your kids can always take out loans, but you won’t be able to borrow for your retirement.

A smart alternative: Don’t take it with you

Pass on money to your children now rather than bequeathing it. Gifts of up to $11,000 a year are tax-free.

6.)    Buying last year’s top performing
mutual fund

 

Today’s hot fund is almost certain to be tomorrow’s loser. Opt for funds with a history of low costs and returns in line with peers.

A smart alternative: Rebalance once a year

Once a year, trim back investments that have grown and add to those that have lagged to match your ideal portfolio allocation (use our Asset Allocator). Do this once a year and you automatically sell high, buy low and, studies show, add measurably to your final return.

 

7.)    Buying tax-free bonds and variable annuities for your IRA

 

It’s like wearing a poncho and carrying an umbrella, only worse. You get no extra tax benefit from the annuity, and the bonds’ interest will end up taxed.

A smart alternative: Save on a schedule

Invest the same amount in a mutual fund every month. That ensures you’ll buy more shares when they’re cheap and fewer when they’re expensive.

 

8.)    Stretching out loan payments

If you take a 40-year mortgage or a six-year auto loan, you’ll fail to build equity, and you’ll pay more interest over the life of the loan.

 

A smart alternative: Fix your ARMS

Replace an adjustable-rate mortgage with a 30-year fixed-rate version (recently at 5.8 percent). Short-term rates are already heading up, but long-term mortgages are still historically cheap. Lock in now and never worry again about your housing costs spiraling out of control.

 

9.)    Poor claim management

Filing homeowners insurance claims for minor bills that exceed your deductible by a couple hundred bucks is not smart. You’ll just wind up paying more in premiums the following year. Save claims for real disasters.

 

Open a home-equity line of credit –for the right reasons

 

Open a home-equity line of credit to tap as a rainy-day fund, to finance college for your kids or yourself, or to pay down credit-card debt. But don’t raid your home’s equity to fund vacations, plasma TVs and that Beemer you can’t afford.

10.)                        Applying for more than two credit cards

You’ll damage your credit score while increasing your temptation to run up balances.

A smart alternative: Know your credit score

Order your credit score from all three major credit bureaus for $45 from Myfico.com. True, you’re entitled to free copies of your credit reports this year, but one detail will be missing: the magic number that lenders and insurers use to judge your credit-worthiness. Pay for that.

11.)                        Buying life insurance on your kids

If your kids don’t support the family, they don’t need insurance.

A smart alternative: Get disability insurance

You have about a 30 percent chance of becoming disabled for three or more months at some point in your working life. Disability insurance keeps the cash flowing. You need this. If you’re not covered at work, get a policy that pays 60 to 70 percent of your earnings until age 65.

 

12.)                        Getting a tax refund

It’s an interest-free loan to Uncle Sam. Use the calculator at irs.gov to adjust your withholding so that you can keep more cash each month.

A smart alternative: Cut your losses

Sell a stinky stock or fund. In a taxable account, your losses can offset capital gains and cut your taxes, thus converting a dumb investment into a smart tax break. If you change your mind, you can always buy the fund back.

13.)                        Job hunting at work

Don’t photocopy your résumé at the office instead of at Kinko’s. Ask yourself if the money you’re saving is worth the risk that you’ll a) have a paper jam; b) run into your boss; or c) leave your original in the machine.

 

A smart alternative: Network your way to a better job

Meet a former colleague once a month for a bite to eat. A regular lunch date could reward you with a fat, up-to-date Rolodex the next time you’re in the job market.

 

14.)                        Paying retail right off the bat

A simple Web search or a few phone calls should tell you whether you’d save by buying elsewhere.

 

A smart alternative: Dicker with the doctor

For routine and scheduled procedures like orthodontics, MRIs, colonoscopies or medically prescribed physical therapy, call your insurer and find out what it considers a “reasonable and customary amount” for the treatment. Then ask your doctor to match it. He or she probably will. Patients who ask get a lower price about half the time.

15.)                        Filling up the rental car

Prepaying for a full tank of gas when you rent a car. You’re buying gas for the rental agency.

 

A smart alternative: Fill ‘er up with regular

Never pay for premium gas. It won’t extend the life of your engine or do much for your fuel efficiency. It will, however, cost the average driver about $120 a year.

As seen as Money Magazine, July 2005

Tags: 401(k), bonds, credit score, dumb money moves, financial advisor, financial planner, foreign stock, home equity line of credit, Investing, money, mutual fund, Retirement, Saving Money, stock