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Five common money management mistakes to avoid

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Updated: 8/16/2013 2:48 pm Published: 7/03/2013 7:37 am

Most people try to avoid making major mistakes when it comes to managing their money. But we're all human, and even the most savvy money managers and budgeters aren't immune from making a few money management blunders.

Learn from the mistakes of others and try to avoid making these five common personal financial and money management mistakes:

1. Cashing out your 401(k).When leaving a job where you contributed to a 401(k) retirement plan, you'll have a few options: You can leave the money in the former employer's plan, roll it over into an IRA, or cash it out. The latter is usually the least-wise option from a financial perspective because you'll have to pay taxes on the money at your current ordinary income tax rate and you could also be subject to a 10 percent early withdrawal penalty if you're younger than 59 and a half.

Unfortunately, 43 percent of workers who left their jobs in 2012 took a cash distribution from their 401(k), according to Aon Hewitt.

2. Not contributing to your retirement plan when the financial markets fall. It's understandable that you might not want to invest money when the financial markets - and your account balance - go down. But this may actually be the best time to invest, because lower financial markets may mean lower asset prices. Remember the old investing adage: 'Buy low, sell high.'

3. Giving in to 'lifestyle inflation.' This is the term some financial experts have coined to describe what happens when an individual's lifestyle rises commensurate with his or her income. So if you experience a 10 percent increase in your income, congratulations! But resist the urge to immediately increase your spending and expenses by 10 percent. Go ahead and splurge on something nice if you like, but strive to save as much of the extra income as you can, instead of moving into a more expensive home or buying an expensive new car.

4. Paying bills late and bouncing checks.Many people who pay bills late do so simply because they forgot, not because they didn't have the money. To avoid this mistake, consider signing up for your bank's online bill pay service, or for auto-drafts or online payments that are available from most utilities and credit card companies. Your bank may also offer an overdraft protection service that automatically transfers money from a savings account to cover checking account overdrafts. There may be a small fee for this transfer, but it's usually much less than the fee charged for an overdraft.

5. Carrying a credit card balance.A common misconception is that carrying a balance on your credit card will help improve your credit score. This generally isn't true - in fact, it may even hurt your score. Worse yet, you will likely pay a high interest rate on credit card balances. Many financial experts recommend paying your credit card balances in full each month, if possible, even if you have to take money out of savings to do it. For example, if you are earning 1 percent interest on your money market savings, but paying 18 percent interest on your credit card balance, it's usually wise to use some of your savings to pay the credit card balance. If you can't pay the balance in full, try to pay more than the minimum payment due each month.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.

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