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Managing personal finances can seem like a hodgepodge of endless checklists and rules of thumb.
With all sorts of financial considerations vying for attention—budgeting, saving, paying off debt, getting insurance, being smart shoppers—consumers may inadvertently overlook some important things.
These are some of the biggest financial blind spots, according to several certified financial planners on CNBC’s Digital Financial Advisor Council.
As part of its National Financial Literacy Month efforts, CNBC will be publishing stories throughout the month to help people manage, grow and protect their money so they can live truly ambitious lives.
1. Credit score
Consumers often don’t understand how important their credit score is, said Kamila Elliott, CFP, co-founder and CEO of Atlanta-based Collective Wealth Partners.
The score influences how easily consumers can get credit – such as a mortgage, credit card or car loan – and the interest rate they pay on that debt.
The number is generally between 300 and 850.
Credit agencies like Equifax, Experian and TransUnion determine the score using a formula that takes into account factors such as bill payment history and current unpaid debts.
According to the Consumer Financial Protection Bureau, lenders are generally more willing to provide loans and better interest rates to borrowers with credit scores in the mid- to high-700s or above.
Let’s say a consumer wants a $300,000, 30-year fixed-rate mortgage.
The average person with a credit score between 760 and 850 would receive an interest rate of 6.5%, according to national FICO data as of April 1. In comparison, someone with a score between 620 and 639 would receive an interest rate of 8.1%.
The latter’s monthly payment would cost $324 more compared to the person with a better credit score – that’s an additional $116,000 over the life of the loan, according to FICO’s loan calculator.
2. Wills
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Wills are fundamental estate planning documents.
You decide who will receive your money after your death. A will can also specify who will look after your children and manage your money until your children turn 18.
Planning for such a grim event isn’t fun — but it’s essential, said Barry Glassman, CFP, founder and president of Glassman Wealth Services.
“I’m shocked at the number of wealthy families with children who don’t have a will,” Glassman said.
Without such a legal document, state courts would decide for you — and the outcome may not be what you want, he said.
Taking it a step further, individuals can create trusts that can give them more control over details such as the age at which children gain access to inherited funds, Glassman said.
3. Emergency savings
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Deciding how much money to set aside for a financial emergency isn’t a one-size-fits-all calculation, said Elliott of Collective Wealth Partners.
One household might need three months of savings, while another might need a year, she said.
Emergency funds include money to cover necessities – such as mortgages, rent, utilities and food payments – in the event of an unexpected event such as a job loss.
A single person should generally try to save for at least six months of emergency expenses, Elliott said.
This also applies to married couples where both spouses work in the same company or in the same industry; The risk of a job loss occurring at or around the same time is relatively high, Elliott said.
On the other hand, a couple where spouses earn similar incomes but work in different fields and professions may only need three months of expenses. If something unexpected happens to one spouse’s employment, chances are good that the couple will be able to temporarily rely on the other spouse’s income, she said.
Business owners should aim to cut expenses for at least a year because their income can fluctuate, as the Covid-19 pandemic has shown, Elliott added.
4. Tax withholding
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Withholding tax is a pay-as-you-go system. Employers estimate your annual tax burden and withhold appropriate taxes from each paycheck.
“Ten out of 10 people couldn’t explain how the withholding system works,” said Ted Jenkin, CFP, CEO and founder of Atlanta-based oXYGen Financial.
Employers base these withholdings in part on information employees provide on a W-4 form.
Generally, taxpayers who receive a refund during tax season have had too much withheld from their paychecks throughout the year. They receive these overpayments from the state in the form of a refund.
However, those who owe money to Uncle Sam did not withhold enough to cover their annual tax liability and must make up the difference.
People who owe money often blame their accountants or tax software rather than themselves, even though they generally can control how much is withheld, Jenkin said.
Someone who owes more than $500 to $1,000 may want to change their withholding, Jenkin said. This also applies to someone who receives a large refund; Instead, they may want to save that extra money (and earn interest on it) throughout the year, Jenkin said.
Employees can fill out a new W-4 form to change their withholding.
You may want to do this for any major life event, such as a wedding, divorce, or the birth of a child, to avoid tax return surprises.
5. Retirement planning
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“I think people underestimate how much money they will need in retirement,” Elliott said.
Many people expect their spending to decline in retirement, perhaps to about 60% to 70% of what they spent during their working years, she said.
But that’s not always the case.
“Yes, maybe the kids are out of the house, but now that you’re retired you have more time, which means you have more time to get things done,” Elliott said.
She asks clients to imagine how they would like to spend their life in retirement — travel and hobbies, for example — and estimate how their spending might change. This helps guide general savings goals.
Households also often don’t take into account the potential need for long-term care, which can be costly, in their calculations, she said.
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2024-04-04 14:13:23
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