Monday, February 1, 2010
Two weeks ago, I identified some common mistakes that several of us make with our personal finances. I pointed out that not having a written financial strategy is the primary cause of the blunders we make. Here are a few more errors that, when identified, can help us avoid unnecessary financial headaches in the future.
We all knew someone in high school or college who seemed to wait until the last minute to do everything. Some of them were even very talented at doing so. They put off things and then made the most of the last few seconds before an assignment was due. You may think of someone else or perhaps even of yourself. Procrastination seldom works, however, when it comes to personal financial matters. A major financial mistake that arises from not having a written plan is usually an unexpected event that springs us into action. It is at that time that many people wish they had not waited to plan strategically.
Lack of tax planning
Although situations arise for many of us that can change our tax situation, it is important to approach each year with some level of strategic planning. At the beginning of each year, or at the very latest in mid-April when your tax preparation for the previous year is complete, analyze the remainder of your current tax year. Changes in your income or deductible expenses can have a major impact.
Spontaneous decisions, such as large early withdrawals from retirement plans, can also have an effect on your tax liability by increasing your income or through penalties.
Although most tax planning is to avoid paying a considerable sum to the IRS each April, getting a large federal tax refund is not a good strategy either. Why would you let the government borrow your money at no interest for several months? If you find yourself getting a sizable amount back each year, you may need to adjust your withholdings on your W-4 with your employer. Although there are several resources online, it can be very beneficial to contact a local tax professional to not only prepare your returns but to help you strategically plan for the current tax year. A withholding calculator and more information can be found at www.irs.gov.
Inadequate or improper life insurance
Inadequate or improper life insurance can leave you either insufficiently covered or paying for coverage you may not need. The primary objective of any insurance policy is payment of a benefit to protect heirs from financial hardship in the event of the policyholder’s death. It is so important to have your income and liabilities covered in the unlikely event that they would be the responsibility of your spouse or children. That is why when you meet with insurance professionals to discuss coverage, you should ask a lot of questions. Always make sure the primary objective above is being met and then, if you can afford it, additional coverage can be added. Most of the time, term life insurance can cover the primary objective, and policies like permanent or whole life would be additional coverage that may be beneficial based on individual circumstances such as health history or insurability. As always, contact an insurance professional to analyze your individual situation.
Remember, effective planning is the key to avoiding financial blunders. We all make some financial mistakes, but the important thing is to apply what we learn from them.