Dear Readers: Playing pranks on someone else is fun, harmless and good for a laugh. But when it comes to money, some folks have a way of fooling themselves into believing they're on top of things — only to discover later that it's not the case.
So, this year, I want to turn the tables and ask you a serious question: Are you being honest with yourself about your finances? You may think so, but I bet there are a few areas where you're cutting yourself some slack. Here are some common rationalizations that can drive you right into a financial bind (then it's no laughing matter).
1. I Don't Need a Budget.
Whether it's formal or informal, having a budget simply means you know how much money you have to spend and how you want to spend it. Plus, it's easy to create. Just list your necessary monthly expenses (including savings) and make sure you have enough income to cover it all before you add on the nice-to-haves. A budget doesn't keep you from spending; it helps you spend mindfully and live within your means.
2. An Emergency Won't Happen to Me.
You may be lucky enough to never face a major disaster, but even a small unexpected expense can spell financial trouble if you're not prepared. If you don't yet have an emergency fund, start by directing $100 per month into a savings account until you have enough to cover a minimum of three months' necessary expenses.
3. If I'm Short on Cash, I Can Always Use Credit.
Credit can be fine and certainly convenient — if you use it wisely. It's when you carry too much "bad" debt — such as credit cards and other high-interest nondeductible consumer debt — that you have a problem. The answer? Don't charge more than you can pay off each month. Create a plan to pay down current balances. You'll save the most interest and pay off debts faster by focusing first on the highest-interest debt (making at least minimum payments on the others) and working your way down until all are paid off. On the other hand, "good" debt, such as your mortgage or student loans, can be a smart choice — provided you manage it wisely.
4. Retirement Is a Long Way Off.
Even if retirement is far in the future, it's the shrewd saver who starts planning for it now. The earlier you begin, the less you'll have to set aside each year. Have a 401(k)? Contribute at least enough to get the largest possible company match (that's free money!) and much more if you can. Put all your contributions on automatic; come retirement time, you'll be congratulating yourself on how smart you were.
5. I Can Live Without Insurance.
However you might rationalize it, short-term savings on insurance premiums could end up costing you in the long run. Not having enough medical, auto, homeowners/rental or disability insurance could mean big bills when you're least able to pay. As you review your insurance options, take full advantage of all your employee benefits — from health to disability to life insurance — no matter how old you are.
6. I've Got a Sixth Sense About Investing.
Letting emotion — or intuition — steer your stock choices is the very opposite of wise investing. There's no way to time the market, and betting on a single stock is risky at best. The key is to invest in a diversified mix of investments that will add up to a portfolio appropriate for your time frame, ability to take risk and feelings about risk. And long-term investing in the stock market is still one of the best ways to grow your money. So don't wait for your sixth sense to tell you what to do. Come up with a plan and get in the market. Then stay in.
7. I Should Take Social Security as Soon as I Can.
That could be the right choice for you, but most people will do better by waiting. So, run the numbers. If you collect at age 62, your benefit is permanently reduced by about 25 to 30 percent of what it would be at your full retirement age. If you wait even longer — until 70 — your benefit will grow about 8 percent per year. That difference can add up to a considerable amount of money, especially if you enjoy a long life.
8. Estate Planning Is Only for the Wealthy.
You don't have to be wealthy to at least put the basics in place: a will that states how you would like your assets distributed and names a guardian for any minor children; powers of attorney for financial and medical decisions; and an advance healthcare directive that outlines the type of end-of-life care you want, should you become incapacitated. Beyond that, your estate plan will depend on the complexity of your financial situation.
9. I Don't Need Any Help.
No matter how savvy you are, when it comes to your financial future — especially retirement — it's good to get a second opinion. Talking to a financial adviser, at least occasionally, can give you a more realistic picture of where you are and the plans you need to put in place.
10. My Family Doesn't Care About the Details.
Even if you generally take the lead, it's important that your spouse or partner understands your finances and participates in all major decisions. And when it comes to estate planning, your adult children would definitely want to know what to expect.
If you see yourself in any of these statements, it's time to do some rethinking. This year, take a look at your finances and make sure the joke's not on you.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of "The Charles Schwab Guide to Finances After Fifty." Read more at http://schwab.com/book. You can email Carrie at [email protected] The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.