Investing: Five Costly Financial Mistakes
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Insufficient disability income insurance -
Most financial planners say disability insurance is as important as life or
health insurance. Most people have life insurance but they ignore the risk of
disability. It's a fact that you are more likely to become disabled than dying.
Your employer may offer coverage but it may not be enough and some employer
policies are taxable (meaning if the policy pay 50% of your salary, taxes are
taken out first). Your employer-offered plans are covered by federal law,
limiting the amount of compensation policyholders can collect through the courts
should policies ever be unfairly terminated.
If you qualify and can afford to buy your own individual
policy, you should consider buying it. Expect to pay between 1.5% to 3% of the
total income you insure. You should also consider getting them while you are
young and healthy. Policies bought by you are generally covered by state law,
which allows for punitive and economic damages in legal actions. Also,
purchasing your own policy with after-tax dollars means you don't pay taxes on
the benefits and you are covered even if you change jobs. Typically, disability
income insurance plans will cover 50-60% of your annual income for a
pre-determined period of time. Before buying , check coverage and costs from
several insurers. Some insurers sell own-occupation policies,
meaning you qualify if you can no longer do your own type of job. Most policies
are any-occupation.
You'll want to study the policy
carefully to understand all of the provisions, including the definition of
disability, the waiting period following disability before you can collect, and
the length of the payment period. The longer you wait before your benefits
start, the lower your premium (cost of buying the policy). And
finally, buy from companies with strong ratings from agencies such as
AM Best and
Standard & Poors.
- Not enough life insurance - You only need life
insurance if someone is relying on your income and would be affected by your
untimely death. Again, most people have group term life insurance through their
employers, but this alone may not be sufficient. It's very important to have
adequate life insurance so your loved ones have something to fall back on when
you are gone. How much life insurance is enough will depend on number of factors
including income and number of dependents. There are several types of life
insurance, but the simplest and the cheapest to buy is to buy
term insurance which is a pure life insurance without any bells and
whistles. Learn more about life insurance.
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Inadequate diversification
- The importance of diversification can not be over-emphasized, especially if
you are near retirement. Diversification is an investment strategy in which you
spread your investment dollars among different markets, sectors, industries, and
securities. The goal of the strategy is to protect the value of your overall
financial portfolio in case a single security or market sector takes a serious
downturn and drops in price.
Diversification reduces the volatility in the value of your whole portfolio (all
of your investments). You can achieve almost the same rate of return that a
single investment can provide with decrease fluctuations in value of your
portfolio. So, "DON'T put all your eggs in one basket".
Learn more about diversification and asset allocation.
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Saving or
investing not early enough - When it comes to your financial security,
time can be either your friend or your enemy. Have you ever heard of the saying
"time is money". Well, when it comes to investing, the more time you have the
faster your money will grow. If you start investing $100 a month at age 20 for
only 10 years and then let the balance grow for another 20 years without any
more investment at 10 %, you'll have $150,112. Where as if you start investing
$100 a month at age 30 for 20 years, you'll end up with only $75,937 even though
you invest twice as much as the first scenario. Invest early but
DO NOT invest
in what you do not understand!
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Not having an estate plan
- Some people have the impression that estate planning is just for the rich.
Unfortunately, that kind of view can be very costly to their loved ones. Your
estate includes such items as your home, cash, investments, personal property,
and other assets you and your spouse may own jointly or as community property.
So you may have more than you think. Federal estate taxes starts at 37% for
estates valued at more than $1 million for year 2002 and be as high as 50% for
larger estates. Add in state death taxes and final expenses and your death can
be quite expensive for your heirs. A good estate plan includes an effective
will, a trust arrangement and adequate life insurance the help your loved ones
get what they deserve.
Seven Common Pitfalls to Avoid
Before you race off through the rest of
Investing Basics, there are some cautionary points to consider before you
proceed. These are common mistakes many people make when considering what to
do about investing.
- Doing Nothing.
There is no guarantee that the market will go up the first day, month, or
even year that you invest in it. But there is one guarantee: Doing nothing
at all will not provide for a comfortable retirement.
- Starting Late.
Postponing your investing career is second only to not investing at all on
the list of investment sins. You already know that the earlier you start
the better off you are. (Take another look at the compound return example
we gave above.) If you're already past those formative twenties (you don't
look a day over 32 to us), we'll reword this first pitfall to read: "Not
starting now."
- Investing for the Short Term.
Only invest money for the short term that you're actually going to need in
the short term. Invest money in the stock market that you won't need for
at least three years, and preferably five years or longer. If you'll need
your cash next year for a down payment on a house or for the family
Caribbean cruise, use one of the shorter term and safer havens for your
cash, such as money market funds or CDs.
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- Playing It Safe.
If you're young, most of your investing dollars should be in the stock
market. You have enough time to weather any dips in the market and to reap
the rewards of long-term gains. Although you may want to transition into
bonds later in life as you depend on your investments for income, stocks
should make up a large portion of the portfolio of every investor.
- Playing It Scary.
Not every investment is for everyone. Even if you're a daredevil, you
shouldn't pour all of your money into something that could end up going
down the drain. When someone
says "Don't put all of your eggs in one basket," they're trying to tell
you to diversify your financial portfolio because the risk of holding
everything in the same place is huge compared to the profit you may or may
not make.
- Viewing Collectibles or Lottery
Tickets as Investments. If old comic books,
Barbie dolls, and abandoned exercise equipment could be used to fund
retirements, do you think the stock market would exist? Probably not.
Don't make the mistake of thinking your jewelry, those Beanie Babies, or
the lottery will provide for you in your latter years.
- Trading In and Out of the
Market. We believe the best approach to
investing is the long-term one. Pick your investments well and you'll reap
rewards over the long term that you had ever dreamed possible. Trade in
and out of the market and you'll be saddled with fees that chip away at
your returns, and you'll potentially miss out on gains that long-term
investors enjoy with much less effort.
Related Article:
Questions you need to ask before investing
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