Smart SpendingSmart Spending

4 common money mistakes

Overpaying your taxes is one of them

By Karen Datko Sep 15, 2009 12:38PM

This post comes from Jim Wang at partner blog Bargaineering.com.

 

One of the biggest challenges in almost anything you do is knowing where your blind spots are. In simpler terms, you don't know what you don't know.

 

So, today I'll point out four money mistakes you might be making that you don't even realize you're making. Hopefully, you're making none of them. If you are making one of these, don't beat yourself up over it. Now you know you're making it and you can take steps to fix it.

Paying too much tax too early. Would you give the government several hundred dollars a month, for no reason, just for the government to write you a check in April? Would you give the government a zero interest loan? Probably not (if you would, feel free to send me money). However, that's exactly what you're doing when you get a tax refund in April.

 

Optimize your withholding and adjust it so that you get a very little refund in April. I wouldn't be too aggressive about it -- owing taxes isn't fun -- but adjust it a little so that you keep the money for your needs. You can save it and earn interest, or you can put it toward projects, products or services you've had your eye on. Either way, it's your money. You should keep it.

 

I listed this mistake first because it's a minor mistake, if one at all. Considering how low high-yield savings account interest rates are, the interest you would have earned by reducing your withholding is minimal. Couple that with the strategy of forced savings -- you can't spend what you don't have -- your withholding can be used as an advantage. You can read more about these ideas in my devil's advocate post on why you shouldn't adjust your withholding.

 

Overanalyzing things. Analysis paralysis. Paradox of choice. This little demon has many names but the end result is the same: You don't make a decision and it's costing you.

 

This problem often happens with 401(k) plans where there are dozens of fund options. Do you want a balanced fund? An index fund? What about emerging markets? What about blue chip? Small cap? Bonds? Treasuries?

 

What happens? You don't pick anything. You don't invest because you don't know what you should have, what amounts, etc.

 

My advice is to set a deadline for any of the decisions you need to make and stick with it. The reality is that it's better to have made a decision, especially when it concerns investing or saving, than to put it off. Every single day you delay is a day of interest you could be earning. Need some ideas for investing? Consider a lazy portfolio. Not sure where to open a Roth IRA? Check out these discount brokers offering cheap stock trades. Just pick one.

 

Maintaining too high a checking account balance. This isn't a killer money mistake but one that many people make. If you know how much you're spending each month, you should try to maintain as low a checking account balance as you can and save the difference in a higher yield savings account.

 

How do you check this? One way is to budget so you know how much you spend. Another way is to look at your daily balance and see how low it gets. If your balance hasn't gone under $5,000 in the last few months, you might want to take at least half of that and put it in a savings account. Savings account rates aren't phenomenal but they're better than getting nothing.

 

Overpaying for index funds. An index fund is a simple creature -- match the benchmark index. An S&P 500 index fund matches the holdings of the S&P 500. Easy as pie. The mistake here is that you might be overpaying for an otherwise simple product.

 

Two of the cheapest index funds, and we'll use the S&P 500 index as an example, are the Fidelity Spartan 500 Index Investor Fund and the Vanguard 500 Index Investor Fund. The Fidelity Spartan 500 has an expense ratio of 0.10% and the Vanguard 500 has an expense ratio of 0.18%, which is 80% higher.

 

If you have your holdings in the Vanguard 500, I'm not advocating you move your funds to Fidelity. However, if you are paying more than 0.18%, which is already an 80% premium over Fidelity, then you're definitely overpaying.

 

Is there a money mistake you recently discovered that I might be committing but don't know about? Let me know in the comments. We all need help finding our blind spots.

 

Related reading at Bargaineering:

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More