En español | Financial advisors reveal bad ideas they often hear from clients and their best advice for better money management.
A lot of people are stretching out the terms of their car loans to 72 months—that’s six years—in order to afford the payments. But if you do that, you have to keep your vehicle for at least seven years for the purchase to make sense. And the reality is that by six years, people get tired of their cars.
So if you’re going to take a 72-month loan, consider whether you’ll actually get to that seven- or eight-year point. If not, think about leasing. Even better, buy a car where you can make the shorter loan payment. You’ll own it quicker and you’ll save on interest.
—Ron Montoya – Senior Consumer Advice Editor, Edmunds.com
I see people thinking and worrying about estate taxes, and paying a lawyer to set up a trust in order to avoid them. For the majority of us, estate taxes are no longer an issue. They were a bigger deal 20 years ago when the Federal limits were lower, but now, the Federal limits are above $11 million per person. I would love for that to be a problem for you, but for most people, it’s not.
Instead of getting a trust, get the estate planning documents that really matter: a health care proxy, a living will, and a medical power of attorney. Making your wishes clear about your health care is more important than people realize and it’s something that affects everybody.
—Judy McNary, financial planner in Boulder, Colo.
I often see one partner taking on the “financial management role,” because he or she enjoys it and the other person doesn’t. But you can never predict what’s going to happen to the person who is handling the finances. And if something does happen, the other person is left figuring it all out in a state of stress and grief.
Carve out time to have discussions about your money. Talk about what would need to happen if anything were to happen to the financial manager. Then rinse and repeat—by which I mean, set a regular time for discussion. These conversations aren’t always easy. But they’re important.
—Frank Paré, financial planner in Oakland, Calif., and chair of the board of directors of the Financial Planning Association (FPA)
What did well last year is just not the same as what’s going to do well this year, or next year, or in 10 years. Companies and economies go in boom and bust cycles. By the time investors identify the hot sector, asset or mutual fund—by the time stories get published in the media and people are talking about it—the cycle is already turning.
So don’t worry about what the future will hold. Just keep it simple, keep it cheap, own a little bit of everything, and expect ups and downs in the market. If you own a diverse, low-cost portfolio and once a year rebalance your holdings (that is, buy or sell stocks, bonds or other investments as necessary to maintain their target proportions in your portfolio), you’ll be fine in the long run.
—Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management
Often when people downsize from a big house where they had children, they then buy a smaller, better appointed place that fits their aging needs. And they forget about the costs involved in selling and buying a home. They also forget about maintenance costs, which rise as you age because you wind up paying someone else to do the work for you.
It’s possible to pay less for your housing, but you have to make sure that the place you want to buy will actually cost you less. In particular, we tell our clients to watch out for the Southern states. They’re no longer as cheap as people think!
—Bonnie Sewell, financial planner, Leesburg, Va.
In reality, you’ll have more problems. People in your life often become resentful. Friends and family will suddenly reach out and ask for help. More often than not, people who inherit money wind up spending it quicker than they thought.
If you come into some money, put a strategy in place. It’s okay to spend some right away, but try to stay within your lifestyle. If you want to help somebody it’s okay, but decide how much in total you want to use for helping people, and divide that by how many people there are you want to help. Then you’ll know what you can give each person.
—Scott Kahan, financial planner, New York City
This is false. In most states, unless you have a special circumstance, the only time you are guaranteed to be able to purchase Medigap coverage—at the lowest possible cost—is during your six-months Medigap Open Enrollment Window, which begins when you enroll in regular Medicare. Once that period passes, health insurance companies can sell you Medigap policies at a higher rate if you don’t pass their medical underwriting requirements, or even deny you a policy altogether. The best time to purchase Medigap is when you first become eligible.
—Danielle Roberts, Medicare expert and co-owner of Medicare insurance firm Boomer Benefits
It’s a big mistake to get lax about your credit score just because you think you have all the credit you’ll ever need. What if your car gets totaled in an accident and your insurance company balks at replacing it? You might need to finance a new set of wheels.
Other financial shocks, like job loss or divorce, can affect your finances later in life too, possibly requiring you to apply for a loan or for a new job—both of which require good credit. But even if you don’t need credit or loans of any kind, your credit score can still impact your finances and your ability to save money. In most states, for example, car insurance companies can legally charge higher premiums to people with low credit scores. In fact, drivers with bad credit scores often pay about twice as much for auto insurance as people with high ones. Bottom line: don’t neglect your credit!
—Lynnette Khalfani Cox, author of Perfect Credit: 7 Steps to a Great Credit Rating.
It’s never too late. It’s a scary feeling when retirement is around the corner and you don’t think you have enough money saved for that chapter of life. But don’t be paralyzed by fear. Instead, have a plan. Beginning at age 50, the IRS lets you make annual “catch-up” contributions. Consider selling things you don’t need, or take on an extra job temporarily to earn some extra income. Cut down your “extras” and put the money toward your savings. The sooner you get started, the more time you have for compound returns to work their magic!
—Chris Hogan, speaker and author of “Everyday Millionaires”
I heard this almost non-stop during the meltdown of 2008. People were cashing out their 401(k)s and selling their stock as quickly as they could just because they saw red numbers. But the only people who lost a penny in the meltdown were those who panicked and sold. Those of us who didn’t freak out and didn’t sell fully recovered and then some. When the market goes down, keep in mind that you don’t lose until you sell something. And if you’re not ready to lock in the losses, just wait.
—John Ulzheimer, credit expert, formerly with Equifax and FICO
Those calls are often frauds, as are calls from the Social Security Administration saying they have benefits waiting for you. Federal agencies do not call you out of the blue; they typically write a letter. And they will never demand you to give out login information or your Social Security number over the phone.
If you get one of these calls, ignore it. Even if you get a letter that looks like it’s from a Federal agency and requires you to call, don’t call immediately. Go online and independently verify that this is a legitimate number or email for that agency. Fraudsters will use an impressive logo and all the right lingo. And by telling you very good or bad news, they’re trying to get you into an emotional state where you become excited or afraid and lose rationality. So no matter what the person on the phone tells you, don’t give out information. Stay calm and verify everything.
—Gerri Walsh, Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA)
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