Everybody makes mistakes- but you don’t have to, especially when it comes to your finances.
Jill Ross, Senior VP & Chief Experience Officer at First Commerce Bank, is helping us live our most financially-healthy lives by avoiding the biggest money mistakes.
DON’T take money out of your retirement fund
Leave your 401K alone. Sounds easy, right? But sometimes, things happen, says Ross, and people are put in a hard place where they have no other choice. Even if that happens, though, Ross says it’s important to be careful.
“The biggest mistake is taking money out of your retirement and paying not only a 10% penalty, but paying income tax
Jill Ross- First Commerce Bank
on it too,” she says. “You could lose 30% to 40% that way, it’s a lot of wasted money.”
And it doesn’t have to be that way, she says. There are completely legitimate ways to take money out of your retirement fund without a penalty, and to lower that loss of money. You could also borrow money against your retirement savings if necessary.
Ross recommends talking to a professional before making any decisions about taking money out of your retirement fund. And unless absolutely necessary, just let it be.
DON’T skip your emergency fund
One way to avoid having to resort to taking the savings from your retirement funds is to have your own emergency fund. It’s also a good way to avoid painful credit card debt, says Ross.
“Have an emergency fund that’s three months of expenses,” she says. “When you don’t, that’s how you incur credit card debt, you put everything on a credit card.”
DON’T waste your debt
First things first, when Ross talks about debt here, she doesn’t mean that credit card with the 20% interest rate. No more putting everything on the card and forgetting it exists while your interest payments skyrocket.
But when it comes to other debt – your mortgage, your car payment, etc. – that, it turns out, you can leverage to your advantage.
“I don’t think debt should always be at zero,” Ross says. “You have certain debt that is tax deductible, as far as mortgage debt. It really depends on the situation, and you should be looking at and comparing interest rates.”
For example, says Ross, the market in general is always on an upside potential, meaning that even though the stock market it has its downturns from time to time, the general rule of thumb is it’s climbing up over time. The average is about a 5% to 8% return on your investments depending on how long you keep your money in the market – which means if you invested your money, you can think of it as returning about 8% eventually.
So, if you’re looking to buy a car, and the interest rate on your loan is 3%, that’s lower than the 8% you would make over your investment in the time you pay off your loan. “I might be in a position to pay off the car at once in cash, and it’s tempting to have zero payments,” Ross says. “It’s a risk/reward strategy, but I can use some of that cash to invest and see a return.”
And when it comes to paying off your debt, prioritizing is key. More often than not, you’ll want to tackle that credit card debt first – it’s where the big interest rates are.
But if you have any doubts, it’s best to talk to a professional, says Ross, who can help you navigate all of the interest rates.
DON’T ignore your family’s finances
Say it with us, “finances are a family affiar.” Or at least, they should be. But that’s usually not the case, says Ross.
“Generally, a lot of women don’t get involved in how much they have saved, and how much is invested, and how to pay the bills and how much debt there is,” she says. “I think it’s changing. The main thing is to know the whole picture, even if you’re not the financial person in the relationship.”
For example, as the “financial person” in her family, Ross has a spreadsheet with everything “household finance” that her husband has access to. It has their passwords, their bills, their cash flow, and the two discuss it throughout the year so that everyone has a general understanding of how the finances work in the house.
