Money: How to avoid misusing it


IF YOU BUY stocks on a hot tip, spend more than you earn or have yet to take full advantage of your employer's retirement savings plan, you're not alone.


Experts say these are some of the most common money mistakes people make that can help derail their financial futures. But the good thing about mistakes -- either your own or others' -- is you can learn from them. And better yet, it might not be too late to correct them.

With that in mind, we asked financial pros to name some of the most frequent financial errors:

Living beyond your means. The average American spends $1.20 for every $1 earned, putting the national savings rate at a 60-year low, says Gerri Detweiler, co-author of the book, "Slash Your Debt."

"One of the huge mistakes we make is living paycheck to paycheck and thinking the paycheck will always be there. And it may not be there," says Detweiler.

Financial experts suggest salting away enough money to cover living expenses for three to six months so that in an emergency you don't resort to using credit cards that carry high interest rates and late-payment penalties.

Having no financial plan. A plan is a road map of where you stand financially now, where you want to be later and how you plan to get there. The plan should be revisited at least once a year and updated during major life changes, such as a divorce or new job, says Pat Roche, first vice president of Merrill Lynch & Co. in Baltimore.

Having no budget. "Budgeting" conjures up as much joy as "dieting," but develop- ing a budget is a basic step in money management, planners say. The best way to start is to track your expenses for one month to find out where your money goes and where you can make some trims so you can save money or pay down debt.

People often discover they fritter away money on small things, says Deborah Voso, a certified financial planner at Voso Associates in Frederick. One of her clients, for instance, found he spent $65 a month at Starbucks coffee.

Not taking full advantage of your 401(k). To encourage participation, employers often match workers' contributions to this savings plan up to a certain level. The most common match is 50 cents for every $1 workers contribute. That's an immediate 50 percent return. Still, many workers don't contribute enough to get the full match. "Why wouldn't you take advantage of the free money?" Voso says.

Timing the market. Some investors have pulled money out of the stock market, waiting on the sidelines until potential Y2K computer problems next year pass, says Beth C. Rosenwald, a financial adviser with Legg Mason Wood Walker Inc. in Baltimore.

"The bottom line is you never know whether the market is going to move or whether the market will rebound," Rosenwald says. "You should go into investments religiously every month."

An easy way to do that is to have a set amount of money withdrawn automatically each month from your account and invested in stocks or mutual funds, she says.

Not reading the fine print. A prospectus describes an investment and its risks, but many investors ignore the often tedious document and jump in anyway.

"If you don't take the time to carefully read the description of the investment opportunity, you don't know the risk you are incurring or whether the investment meets your financial objectives," says Bradley Skolnik, president of the North American Securities Administrators Association.

If it's the language that confuses you, find a financial pro to explain the lingo and investment to you, he suggests.

Failing to do background checks. Before leaping into investments, particularly exotic ones, or into a relationship with a broker or investment adviser, call the Maryland Securities Division at 410-576-6882, securities regulators say. The agency can provide you with a broker's or adviser's background and disciplinary record and tell you whether the investment meets registration requirements. Registration is not a seal of approval, but it does indicate whether the issuer is following state regulations.

Lacking diversification in stock portfolios. Investors should spread their stock market risk by investing not only in different companies but in different industries. Even with mutual funds, which might own hundreds of stocks, you can wind up with all your eggs in one basket if you're not careful.

"Too many people will split all their money among three funds, not realizing those three funds invest in the same category. They triplicate themselves," says Paul Shea, a financial adviser with Morgan Stanley Dean Witter in Crofton.

To diversify your stock portfolio, look beyond large U.S. companies that have dominated the market in recent years and consider smaller companies, good companies that have temporarily fallen out of favor with the market or international firms, Shea adds.

Investing in "hot tips." You get a tip at the gym or a party about the "next Microsoft" and dump dollars into the company's stock without any investigation. The problem here, says Merrill's Roche, is that "by the time [the hot tip] gets to the cocktail party or the gym, the smart money is out of it," and you and other latecomers lose out.

Before buying on tips, investigate the company, talk to a financial professional or experts in the industry you're investing in, she advises.

Lacking estate documents. No one likes to think about, let alone plan for, their own death. But with a will and other estate-planning documents, you can name your children's guardian, shield sizable estates from hefty taxes and designate whom you want to make financial and medical decisions for you if you become incapacitated.

Not talking. You can get people to divulge embarrassing details of their sex lives on national TV. But they can get awfully tight-lipped when it comes to talking to family members about finances.

By keeping mum on family finances, relatives may be forced during a crisis, such as a death, to make important financial decisions in the dark, Roche says. Talking about finances doesn't mean you have to divulge dollar figures. A good start is to let family members know the names of your lawyer, accountant and financial adviser or where you keep your will, insurance policies, deeds and other important papers, she says.

Last, don't get discouraged if you are guilty of some of these missteps. It might take only a little time to get back on track. And remember, you're not alone.

Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at

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