On any given day, we face a myriad of financial decisions: What to buy, how much to spend, where to save. And when life gets busy, it's easy to make mistakes - some small, others big. Here are five major mistakes that can really take a toll on your finance and some advice.
1. Lacking Long-Term Disability Insurance
First, if you think health insurance is all you need to help you in case of an accident or medical setback, think again. Do you have long-term disability insurance, which can help to replace usually 60% of your income while you're unable to work? If you're single or the breadwinner in your household, this is vital. Yet, according to a new survey by the Consumer Federation of America, two-thirds of private sector workers overlook this, even though most employees say missing a paycheck for three or more months from sickness or injury would be financially devastating. Depending on your policy, long-term disability insurance can cover claims stemming from breaking your arm, being on bed-rest, or even a mental health illness. Plans provided by an employer cost roughly $10 to $30 a month. Private coverage is usually two to three percent of income.
Also See: Common Money Traps to Avoid
2. Failing to Properly Review Your Taxes
Next, for married couples filing their taxes jointly, it's common for one member of the household to handle the paperwork. And if that's not you, don't turn a blind eye. Signing tax documents without properly reviewing or understanding the numbers is risky business. If there are mistakes, like underreported income or questionable deductions, both of you will be on the hook for an audit - or worse - a fine. The only time a spouse isn't equally penalized is if he or she didn't know what was going on and didn't benefit from the error, which can be a hard case to prove.
To protect yourself, know the exact total of what you and your spouse earn. Compare that with the number stated on line 22 of your 1040, which is your "adjusted gross income." That's equal to your total household income minus exemptions and deductions. Does it look to be in the right ballpark based on your lifestyle and expenses? When in doubt, always get a professional opinion from either your family accountant or a certified public accountant.
3. Confusing Debt "Settlement" with Debt "Management"
When it comes to debt, one grave mistake is falling victim to an aggressive "debt settlement" firm that claims it can get you out of debt in the blink of an eye, risk-free. If it sounds too good to be true - it probably is. Know this: Debt settlement companies work with your creditors to "settle" your debt for, say, 50 cents on the dollar and while it's a quick fix, this arrangement will ultimately hurt your credit score. Instead, seek the help of a "debt management" program like one from the NFCC or Money Management International, which work with your creditors to reduce your monthly payments. The goal is to repay 100% of your debt and usually takes two to four years to complete, for $10 to $15 a month. Sometimes fees will be waived for extreme hardship.
Also See: 5 Costly Wedding Mistakes
4. Closing a Credit Card Account
Yet another money mistake is closing a credit card account after you've paid it down. Keep in mind the card's credit limit, especially if it's more than a few thousand dollars, can help strengthen your credit score. My advice: pay down the card and afterwards keep it open, using it sparingly to keep it just "active" enough so the credit card company doesn't shut it off on its own.
Also See: Pay These Bills First
5. Not Knowing All Your Financial Passwords
Finally, do you know passwords to all of your family's financial accounts? Chances are, you know some but others might be a guess. This can pose a problem if your partner or spouse manages most of the bills and financial accounts but then suddenly isn't able to do so. To stay organized, keep a running list of all online usernames and passwords including - but not limited to - your family's cell phone plan, utilities, mortgage, joint credit cards, brokerage accounts and insurers. Keep a hard copy in a fireproof lock box in your home or safe deposit box, as well as on websites like PassPack.com or Clipperz.com where you can securely store all your household passwords in one place for free.
Even if your spouse is the one who regularly handles the bills and accounts, make a habit of checking often to make sure they're still in good standing. A site like Manilla.com can help families who wish to share and check up on all household accounts and paperless statements in one place.
What are some other money mistakes that seem minor, but can possibly cause major issues? Connect with me on Twitter @Farnoosh and use the hashtag #finfit