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Avoiding Common Money Management Mistakes

After nearly 20 years of meeting with people to review their financial situations and gathering information for Kentucky Living’s Money Matters column, I’ve found that most investors make the same mistakes time after time.

From this I’ve come up with a list I like to call “How to Manage Your Money,” or the most common mistakes to avoid.
Planning ahead by using the following tips will, slowly but surely, improve your financial situation.

1. Are my financial records organized? Without up-to-date information, you cannot plan and are unlikely to take all the tax advantages available. For example, have you explored wealth-transfer techniques?

2. Establish credit in each spouse’s name. This will especially come in handy to ease the trauma caused by death or divorce. Men and women should each ask themselves: Do I know my credit score? Do I know where all my assets are located? Are there changes in my life that I anticipate within three years?

3. Set realistic financial goals. People do not plan to fail—they fail to plan. More than 80 percent of eligible workers participate in employer-offered 401(k) plans, but only half have $13,000 or more to supplement future Social Security payments. Workers in their 40s and 50s have more than 50 percent of their 401(k) money invested in stock of the company where they work; no more than 30 percent should be so invested, recommends Dee Lee, co-author of The Complete Idiot’s Guide to 401(k) Plans.

4. Set realistic budgets. “Pay yourself first” through a systematic savings method. Set up a rainy-day fund equal to at least one month’s income, and later save up three months’ income. This can mean the difference between inconvenience and serious hardship, especially in these days of job cutbacks.

5. Is my will or trust up to date? Also, coordinate the activities of advisors, such as financial planner, attorney, banker, and accountant. If you are widowed or a widower, make a list of these key associates and let a family member or close friend know where the names can be found.

6. Is my life insurance in order? Are you paying too much for the coverage you do have? Should you have more? Have you considered life insurance as a way to fund your estate-tax liability?

7. Are you prepared for an emergency disability? What if you get sick or hurt, and your employer’s check stops?

8. Have you planned for the future of others? Do you have adequate medical and health insurance for family members? How about long-term health care or nursing-home coverage?

9. Do you borrow money for the right reasons? Credit card interest can double the cost of an expensive weekend trip, which may be long forgotten by the time the bill arrives.

10. Do you have a competent tax professional? Will he or she review your financial activities for their tax impact and aggressively seek additional deductions and tax breaks? Will the advisor represent you at an IRS audit and strongly defend the position taken on the return, even when the tax law is not clear?

11. Do you adjust your federal withholding exemptions? If you work for someone else, make sure you change your withholdings to increase your net tax flow.

12. Have you considered hiring a financial planner? Questions to consider: Are my investments appropriate in today’s economy? Are my assets titled properly? How would changes in my parents’ financial situation impact my financial well-being?

13. Set financial goals. If you do not know where you are going, how are you going to get there?

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