August 02, 2018
Throwing away free money
Based on a 2017 Vanguard study, only 79% of eligible employees participate in their 401k plan. If you are eligible and not contributing, there is a 90% chance you are missing out on money your employer wants to give you*. For example, assume your employer promises to match $.50 per every $1 you contribute, up to 6% of your pay, and you make $50,000 per year. This means they are willing to give you $1,500 in exchange for you taking $3,000 and putting it back in your pocket for later use. $3,000 may sound like a lot of money, but when you break it down, that is about $8.21 per day. Assume you continue to make $50,000 for the next 20 years. That is $30,000 of free money and $60,000 of your money you saved. Add a 5% return rate over that time period and you now have about $148,800 in your retirement account. Perhaps skipping that morning latte and/or packing your lunch in exchange for a retirement contribution sounds a bit sweeter?
Letting the court make decisions for you
Unless you would like the court to decide who cares for your children, pets, and belongings in the case of your death, execute a Last Will and Testament. This document allows you to provide instructions as to who should care for your minor children, receive your home, care for your pets, and receive your financial assets. You should also consider executing a Financial Power of Attorney, which allows someone you trust to take care of your finances in the event you are incapacitated. Depending on where you reside, you can likely find an attorney to draft these two documents for a few hundred dollars. It is also important to complete a Health Care Power of Attorney and Living Will to name a trusted individual to make health care decisions in the event of serious illness or injury and state your wishes around life support and comfort care. You can obtain a free copy of Ohio’s Health Care Power of Attorney and Living Will documents online or at most hospitals. These documents will save your loved ones many headaches, especially during what is likely to be a difficult time.
Not having an emergency cash fund
More than half of adults have less than $1,000 in savings according to a 2017 GOBankingRates survey. As a general rule, you should try to have a savings account that would cover at least six months of expenditures in the case of job loss, unexpected home and car repairs, or medical costs. Make your money productive by holding your cash in a savings account that pays interest. As of 2018, many online banks are paying 1% to 1.5% and allow you to link your checking account, providing quick access to your money.
Not utilizing a Health Savings Account if you have a high deductible health plan
In 2017, approximately 43% of individuals under age 65 with private health insurance were enrolled in a high-deductible health care plan according to the National Center for Health Statistics. Typically, members enrolled in these plans are eligible to contribute to a Health Savings Account. As of 2018, an individual may contribute up to $3,450 per year and a family may contribute up to $6,850. Individuals age 55 and older may contribute an additional $1,000. Contributions are tax-deductible, “above-the-line,” meaning the contribution reduces your taxable income dollar-for-dollar. Contributions can be distributed right back to you for qualified healthcare expenses you have to pay out of your pocket (like deductibles and co-pays). If you are covered by a high-deductible health plan and have a large upcoming health expense, contribute to the health savings account to lower your income tax liability and then reimburse yourself right from the account. Be sure to keep your receipts in case of an audit.
Paying for your credit report
Do not pay to check your credit report. Federal law requires each of the credit reporting companies to provide each American with a free copy of their credit report every 12 months. You can check your credit report at www.annualcreditreport.com. This allows individuals to check one of three bureaus every four months. Often, credit card companies and banks also will provide your credit score at no cost for using their credit card or banking services.
Written by: Samantha J Anderson, CFP®