10 nasty money habits to kick

Stop making the same mistakes every year and wondering why you can’t save. Break the cycle and change your life.

Remember the movie "Groundhog Day," the one where Bill Murray kept reliving the same day? Some people live their financial lives like that, making the same mistakes over and over.

But you don't have to be one of them.

To help you avoid being a repeat offender, here are 10 of the common money errors that many of us make repeatedly, along with the real-world cost of each and a better way to handle each situation.

• Spending without a budget.
• Carrying a balance on credit cards.
• Ignoring interest rates.
• Not investigating disability insurance.
• Failing to see how little purchases add up.
• Not matching employer's contribution to retirement.
• Waiting until the last minute to fund IRA.
• Paying everyone else, saving "what's left."
• Not managing your investments.
• Getting emotional about your investments.

Spending without a budget
Many times when people think of financial planning, they think only in terms of investments, says John K. Ritter, CFP, co-owner of Ritter Daniher Financial Advisory in Cincinnati. But if you have income and bills, you also need a budget. Too many times, "there is more outgo than income," he says.

The cost: Your financial peace of mind and the ability to plan long-term. "Easily, I would think people misstate what they think they are spending by every bit of 15% to 20%," says Ritter.

Instead: Keep track of what you spend to get an idea of where your money is going. "The key is to account for those things that aren't regular bills -- groceries, entertainment dollars," he says.

And set a little aside for one-time emergencies, like car repairs, a broken washing machine or a trip to the emergency room. People tend to leave those kinds of expenses out of a budget because they tend to be one-offs. "What they don't tag is that there are always one-time expenses," says Ritter.

Carrying a balance on credit cards
Interest rates can be 18% to 21% or more, says Annette Simon, CFP, principal with Mosaic Wealth Management in Bethesda, Md. "People making minimum payments never get the thing paid off," she says.

Another way to think of it: Treat yourself to a nice dinner, and 20 years from now you'll still be paying for it. "In general, carrying a balance on your cards is a terrible idea," she says.

The cost: If you have a $5,000 balance on a card with an 18% annual percentage rate, or APR, it will take 26 years to pay if you just make the minimums. Including interest, you'll end up shelling out more than $12,000. (And that's assuming you never use it again, make every payment on time and don't incur any fees.)

Instead: Pay balances in full each month. If you need to use a credit card to handle an emergency (medical bills and car repairs, not a quickie vacation), use it, then stop using credit until you have that bill paid.

Ignoring interest rates
Whether it's your money market rate or what you could get on a mortgage refinancing loan, it pays to keep up with the current prices of borrowing and lending money, says Beth Gamel, CPA/PFS, an executive vice president with Pillar Financial Advisors in Waltham, Mass.

The cost: Lost income if you could have been getting a higher rate of return on your CDs or money market account. Higher mortgage payments if you don't take advantage of lower mortgage rates.

Instead: Stay abreast of the interest trends that impact your personal finances.

Not investigating disability insurance
"Anyone earning an income and supporting themselves needs disability insurance," says Simon. More than 20 million people sustained disabling injuries in 2002, according to the National Safety Council.

The cost: If something keeps you out of work for a few weeks or months, disability insurance could mean the difference between cutting back on a few expenses while you get back on your feet or moving in with family or friends.

Instead: Coverage can be expensive, so find out if your employer offers any kind of plan. If not, do you have the savings to support yourself for a couple of months if you couldn't work? If the answer is no, shop around, and see if you can find a policy in your price range.

Failing to recognize how much little purchases add up
Small amounts, like small leaks, can really drain your wallet. Analyze everything from those nonessential snacks to out-of-network ATM charges to those extra phone plan minutes you're not using.

The cost: If you're like most people, this costs a good chunk of your paycheck.

Instead: Take the records of your cash purchases and lay them side-by-side with your debit and credit card statements to get a complete picture of where you're spending, says Jill Hollander, CFP, president of Financial Connections Group Inc. in Berkeley, Calif. The questions to ask, she says, is: "Where are you spending that money, and does it make sense?"

Not taking advantage of an employer match for retirement funds
One of the biggest mistakes that lots and lots of people make, especially young people, is not investing in their employer's retirement plan at least up to the point where they get the employer's match," says Simon. "By not doing that they're leaving additional income on the table."

The cost: An additional 3% to 5% of your salary annually. Plus a few decades of compounding interest.

Instead: Figure out how much you can afford to contribute, and have the money taken out of your check.

Waiting until the last minute to fund your IRA
“A lot of people wait until April instead of setting aside throughout the year, then they don't have the money," says Hollander.

The cost: A more comfortable retirement. Contributing $4,000 annually to a Roth IRA (and estimating a 5% return) will result in roughly $89,000 in 15 years. With the same terms, $1,000 a year leaves you with a little more than $22,000.

Instead: Put away a certain amount regularly until you hit the contribution limit, Hollander says. "We have clients who put away $500 a month until they reach the maximum," she says.

Paying everyone else then saving ‘whatever is left’
The cost: If all you've saved is scraps here and there, that's what you'll have at retirement.

Instead: Pay yourself first, say Hollander. Take at least 5% to 10% of your check to max out your retirement plan, she says. After that, save outside the retirement plan. Unless you're starting young, "the reality is that just saving in a 401(k) today is not going to potentially be enough money to retire on," says Hollander.

Not managing your investments
You're saving the money. But you also want to make sure your nest egg is diversified and that you have earning goals for various aspects of your portfolio. "Everyone's target is going to be different," says Ritter. The problem is that too many people aren't making the attempt.

The cost: Balancing and managing your investments can mean the difference between a good year and a bad year, Ritter says. He recalls reading one study of mutual fund investors who focused solely on blue chip investments and saw a 2.5% return on their money in 2005, while those who were more diversified earned almost 6%. Add in compounding interest year after year and that gives you an idea of the real cost, he says.

Instead: Look at your holdings like the pieces of a puzzle. Why do you have various assets, and what purpose do they serve toward your goal? What are your goals for each asset, as well as your investments as a whole? Is your portfolio meeting those expectations?

Getting emotional about your investments
Two big mistakes: People fall in love with their investments and hang onto them "beyond the point where they should," or, when the investment starts going down in value, "greed kicks in" and they want to hang on until it bounces back, says Simon. Neither strategy is smart.

The cost: "In a down market, like 2000 to 2002, people lost a lot," says Simon. "It wasn't unusual for people to come in and their portfolios were down 50% to 80%."

Instead: When it comes to timing the market, "nobody can do it," she says. "The smart thing is to invest in a very diversified way. It isn't sexy, but it works."

bankrate.com

Are You a Penny Picker-Upper?

By Dayana Yochim (TMF School) February 23, 2006

They weigh down our wallets, rattle around in our vacuum cleaners, and are summarily dismissed by most vending machines. You never have enough when you need them, yet their value is so inconsequential that store clerks leave bowls of them by the checkout counter completely unguarded.

Still, when the glint of a grubby one on the sidewalk catches our eye, what do we do? Four out of five of us stop and pick it up.

Pennies may be the most vilified currency still in circulation (a handful left as a tip is the ultimate insult to waitstaff), but according to a Coinstar survey released earlier this month, we just can't get enough of them.

The 8th Annual Coinstar National Currency Poll found that 79% of people -- 84% of females and 74% of men -- will pick up a penny off the ground even though more than one-quarter of the population says it doesn't even value loose change or keep track of it.

But maybe we should.

American idle

An estimated $10 billion in change (including pennies) is gathering dust in piggy banks and giant water-cooler bottles (and cookie tins, empty mayo jars, and ashtrays) across the nation. That amounts to nearly $100 per household in out-of-circulation loose change. (According to Coinstar's "how much is in your jar" calculator, an eight-ounce container holds approximately $14.27 in change, while a one-gallon jug could add up to $228.34, depending on the mix of coins.)

The reigning penny-collecting champ is 78-year-old Eugene J. Sukie, a retired glass plant worker/supervisor. Last November, he lugged in the last batch of his 1,048,013-penny collection to the Giant Eagle Supermarket in Lyndhurst, Ohio. (For the decimally challenged, that amounts to $10,480.13.) This was no one-day, one-man endeavor: Coinstar helped Sukie transport the 3.5 tons of pennies he rolled and stored in 575 cigar boxes in his basement for the past 34 years. (Despite the hernia risks, how could the publicly traded self-service coin-counting machine company pass up the PR?)

Sukie said he started collecting pennies because, well, he wanted to see if he could collect a million of anything.

Cents and sensibility

Some might say that putting Sukie's stash back into circulation was a disservice to the U.S. economy. According to the Citizens to Retire the Penny (CRP), this unassuming coin is a gigantic waste of America's time and money. The cost? About four hours and $60 annually per person.

Through a complicated series of calculations (including data from the National Association of Convenience Stores and Walgreen's, estimates about how many cash transactions the average person makes each day, the number of people in line that such transactions might affect, and the loss of work productivity), CRP determined that handling pennies costs the country more than $15 billion annually. That's hardly pocket change.

Proponents of the penny say that eliminating the coin from circulation would lead to higher prices because retailers would round to the nearest five cents, a so-called "rounding tax" that would reportedly cost Americans $600 million annually. Others -- such as zinc miners (pennies are 97.5% zinc) and Coinstar shareholders -- clearly have a vested financial interest in keeping the penny presses running.

All day long you'll have good luck ...

Maybe it's just superstition ... or maybe it's reverence for President Lincoln, but according to the Coinstar survey, two-thirds of Americans say that the penny should be kept as legal tender.

Are we being rational about the pesky penny? According to the work of author Bernice Kanner, reason has little to do with many of our money habits. Kanner sought to answer the burning eternal question -- "Are you normal about money?" -- in her book of the same name. After polling people about their money habits, she found that "normal" is relative when it comes to handling our cash and spare change. For example:

• 15% of us tally the loot in our wallet at least once a day, and 10% never do.
• 72% of "normal people" store bills in rigid order, with smaller currency leading up to higher denominations.
• When the cashier gives us a penny and nothing more in change, just half of shoppers accept it.
• 35% of survey respondents say they wouldn't spend the time and energy to get a refund for anything less than a dollar.
• 26% of people jangle the change in their coat pockets.
• We tip less at restaurants on rainy days and more when it's sunny, when the bill comes on a tray, and when we're eating alone. The tip also improves when waitresses draw a smiley face on the bill. When waiters do it, we're less generous.

If the fate of the penny is left to a coin toss, heed this final finding from Are You Normal About Money?: People are three times more likely to call "heads" than "tails."

Got a bunch of change rattling around in your piggy bank? Here are a few suggestions:

• A quarter a day can add up to $10 grand in a decade.
• Turn your pennies into vouchers for products at Amazon.com.

2005 Tax Law Changes

Taxpayers in 7 states can deduct sales taxes

As in 2004, residents of seven states will be able to deduct sales taxes in 2005.

Everyone else will have to make a decision.

The states where everyone will be able to deduct sales taxes are those without a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Residents of all the other states and the District of Columbia will have to decide: Deduct the sales taxes or deduct state and local income taxes. You won't be able to deduct both sales and income taxes.

This little change came in the American Jobs Creation Act of 2004, the tax bill Congress passed in the fall of 2004. Sales tax deductibility was repealed in the 1986 tax reform law.

The change was made because residents of Florida complained that it was unfair for residents of, say, New York to be able to deduct state and local income taxes when Floridians had no income tax to deduct. So, in the name of tax harmony, Congress came up with this solution.

How much will you be able to deduct? Everything you can document. But since few people expected this provision to be enacted, most taxpayers will have to settle for an IRS formula based on family size and adjusted gross income. You can find the tables in IRS publication 600.

Families with adjust gross incomes of up to $145,950 will be able to claim a full sales tax deduction. That's up from $142,700 in 2004. After those levels, the deduction will be phased out as your income rises.

While this deduction will mainly benefit taxpayers with no income tax, it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, you may have bought a new car, boosting your sales tax total, or claimed tax credits, lowering your state income tax.

This provision is set to expire after 2005 unless Congress extends it.

For more information, see IRS Publication 17 and IRS Publication 553.

Taken from http://moneycentral.msn.com/content/P133794.asp

Building an Emergency Fund

Establishing an emergency savings account is vital in good times and in bad. The purpose of the fund is to sock away three to six months' living expenses. But this money could also be used when you're staring at major, unplanned expenses such as a car breakdown or a leaky roof.

What's important is that you put the money away consistently, and then tap it only for true emergencies. The success of any long-range savings plan depends less on the rate of return than on consistently putting money away and leaving it there.

Lock it up and hide the key
People who are living on a lean-and-mean budget will have the toughest time setting aside money for emergencies. If it's possible to squeeze out another $40 or $50 each month and put it in a money market account, it's worth doing.

Morris Armstrong, a certified financial planner based in New Milford, Conn., says to treat the emergency fund as a bill.

"If you determine you need $3,000 in the fund, look at what you can afford to save each month and use it as a bill to pay yourself," says Armstrong. "If it's $100 a month, that's fine. Put it away and let it grow.

"When you've saved the $3,000 you'll be in the habit of putting away that $50 or $100 a month. Keep doing it. Maybe put it in a nonretirement brokerage account."

Other experts echo the idea of treating the emergency fund as a bill. Put the money away and don't be tempted by the latest sale.

Putting money aside on your own is hard. Retirement plans are successful because the money comes out of your paycheck before you can get your hands on it and because there are taxes and penalties for early withdrawals.

But stashing money in an easy access money market account takes discipline.

"Once you've got the money in your checkbook, there are all these demands coming at you -- the mortgage, taxes, the kid's braces, McDonald's," says certified financial planner Chris Cooper of Toledo, Ohio.

"Then we have this idiot box, the TV, with somebody yelling, 'Zero-percent interest, buy this now!' People get overwhelmed. They know they're not supposed to spend the money, but they do."

Limiting your access to the emergency fund may help. You need to have immediate access to some of the money, but not all of it.

As you're growing your emergency fund, consider keeping it in a money market account or fund until you have about two months of living expenses. Move one month of expenses to a one-month CD. When the CD matures, roll the principal and interest into another one-month CD.

All the while, continue making regular payments to the emergency fund money market account. Eventually, you'll have another month of living expenses that can be used to invest in a two- or three-month CD. If you are opting to set aside six months of expenses, continue the process until you can comfortably purchase a six-month CD.

By Laura Bruce @ bankrate.com

10 warning signs that your 401(k) is in trouble

You can't just sock your money away and forget about it. Getting the most from your 401(k) -- and sometimes getting anything at all -- requires careful tracking of your investments. Here's how to tell if something's amiss.

By Ginger Applegarth

Not all company 401(k) plans are created equal. While most employers and the companies they hire to manage the retirement accounts usually handle everything seamlessly, you can't take it for granted that everything is fine.

You can't just invest whatever percentage you choose of your paycheck each pay period and forget about it. This is your money and your retirement, after all.

If you participate in a retirement plan at work, you know that you have to pay attention to the details. If you're allowed to make your own contributions to the plan, you have to figure out how much you're allowed to contribute, and then how much you can afford to contribute. If the investing decisions are left to you, then you have to figure out which investment options are best for you. And even if it's a plan that your employer contributes to but you don't, you need to make sure that the following four rules of pension plans are being followed.

• The money must be invested in your best interest.
• Expenses must be reasonable.
• Investments must be diversified.
• The money must be invested wisely and carefully.

Unfortunately, some plan participants have found out the hard way that these rules aren't always followed. Employees of one Connecticut company, for example, found that the administrator for their 401(k) plan had diverted their retirement-plan money for his own benefit; he is now in jail, but most of the money is gone.

Here are 10 warning signs that things may be amiss in your retirement plan, according to the U.S. Department of Labor:

1. Your statement is consistently late or comes at irregular intervals. If your employer is contributing to the plan but you aren't, you should be getting an Individual Benefit Statement at least once a year (you may have to request this in writing). If you are making contributions, you usually get quarterly statements. Example: you were getting quarterly statements and now they are only showing up once a year (or not at all), it's time to investigate and find out why.

2. The account balance doesn't look accurate. Pull out your last few statements and compare the balances. Example: it doesn't look as if your employer's contribution ever got credited to you.

3. Your employer didn't send your contribution to the plan in a timely manner. There are strict rules requiring your employer to send your contribution to your plan in order to prevent employers from using their employees' retirement plan contributions as "float." Example: you are having money taken out every month, but January's contribution doesn't show up until July.

4. Your balance has dropped significantly and can't be explained by market ups and downs. By keeping track of the mutual funds or stocks in which your retirement plan money is invested, you know whether those investments gained or lost in value. Example: you invested all your plan money in a Standard & Poor's 500 Index fund, and your plan's value declined in a year when the S&P went up. Check out your options.

5. Your statement shows that the contribution from your paycheck was never made. When you get your statement, make sure every contribution is listed. Example: money is being withheld from your paycheck every month, but somehow April and November's contribution never showed up in your account.

6. Investments listed on your statement aren't the ones you authorized. This could just be miscommunication on the part of your employer about what's in the plan, or perhaps your plan administrator is investing aggressively to try and make up for high expenses or unauthorized investment losses. Example: you signed a form stating you want your money to be split between a large-company index fund and a bond fund, yet your statement says that all your money is in a risky small-company growth fund (or worse yet, your company's stock).

7. Former employees are having trouble getting their benefits paid on time or in the correct amounts. Hopefully, if this happens you will hear about it, but this is a sure sign that something is amiss in the retirement plan. Example: your former colleague opened a rollover IRA and authorized a transfer of funds when he left the company six months ago, and his IRA custodian still has not received his money from your company retirement plan.

8. There are unusual transactions listed, such as a loan to your employer, a corporate officer or one of the plan trustees. You won't see this in your individual statement, but you will see it in the Summary Annual Report, which you should get automatically every year from your plan administrator. Example: The president of the company received a loan of more than $1 million at below-market rates in a year that the company is experiencing financial difficulties. If the president is a new hire, however, the loan may be part of the overall compensation package and you probably shouldn't view this as unusual.

9. There are frequent and unexplained changes in investment managers or consultants. If the managers, administrators or consultants change frequently, it could be that your employer has something to hide and as soon as one of the current advisers starts to catch on, your employer switches to another. Example: your plan administrator has been a different firm every year for the last three years.

10. Your employer has experienced severe financial difficulty. If your employer is having cash-flow problems, those retirement plan contributions being deducted from workers' paychecks are a very tempting source of operating funds. It also is tempting for your employer not to make its required contributions. Example: your company has had three rounds of layoffs in the last six months, and it lost its biggest customer two weeks ago.

original article located @ http://moneycentral.msn.com/content/Retirementandwills/InvestYourSavings/P34680.asp

How Much Should I Contribute to My 401(k) After Graduation?

If you are entering the workforce straight from college, you should sign up for the 401(k) option through your employer and contribute a minimum of 10% of your salary. Ten percent is a good amount to contribute each time you are paid. By contributing 10% as soon as you graduate, assuming you are in your early 20's, you are ensuring that you will have a good start on building your nest egg. Since you are not used to having a lot of extra spending money, your paycheck will still provide you enough money to do pretty much anything you want.