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When it comes to managing money, everyone has a few blind spots. These considerations may help you change course.
1. You have no emergency savings
Nothing can derail a financial strategy faster than an unexpected expense. Without an emergency fund that can cover six to nine months' worth of living expenses in a readily accessible savings account, you could end up strapped for cash when you need it most, leaving you assuming high-interest debt to cover your bills.
Change course: There are several online tools that can help make saving for an emergency fund automatic and (relatively) painless. For example, some apps use algorithms to move small amounts of money from checking to savings based on your spending habits. Or you can set up an automatic transfer from your checking account to a savings account.
2. You're stuck at your 401(k)'s default contribution rate
Consider this: A 30-year-old making $50,000 a year, contributing 3% of her salary and expecting a 2% annual raise, assuming a 7% annualized return with no withdrawals, would retire at age 65 with around $280,000. Boost the contribution by 10%, assume the exact same return and lack of withdrawals, and the balance jumps to more than $1 million.
Change course: Try to use at least a portion of every raise to increase your savings. And don't ignore catch-up opportunities, notes Linda Ward, head of Retirement & Planning Solutions for JPMorgan Chase. If you're age 50 or older, you can add an extra $1,000 to the current $5,500 maximum contribution limit for individual retirement accounts (IRAs), and an extra $6,000 a year to your 401(k).
3. You don't have a financial strategy—and you don't know how to get one
You can't hit a target that you can't see. And you can't tell if you're on track to meet your financial goals if you don't know how much money you'll need or when you'll need it. This is even harder if you don't know where to turn for help.
Change course: You can often meet with a financial adviser at no cost for an evaluation or initial consultation to begin creating a strategy tailored to your specific needs. Jump-start the process by writing down your goals, from your dream vacation to putting the kids through college and retiring, specifying the amounts you'll need to save and the time lines, then prioritize them.
4. You're missing out on tax breaks
Taking advantage of tax-deferred investment options, such as 401(k)s or IRAs, can mean more money in retirement.
Change course: Consult your tax adviser about starting or contributing more to a tax-deferred plan, which allows pre-tax contributions to compound over time. Say, for example, you save $5,500 per year in a tax-deferred retirement account over 30 years. Assuming you take no withdrawals and earn 7% return each year, your plan would grow to $555,902 in 30 years. Though you would pay taxes when you withdraw the money in retirement, even a 33% tax rate would give you $426,904 in after-tax dollars. By contrast, investing in a taxable account means you would have to pay tax on that $5,500 each year before putting it into your account—thus taking a bite out of your yearly contribution before it's had a chance to grow. Assuming the same 7% annual returns, with no withdrawals, you'd have $362,798.
5. You're investing too conservatively
Think the stock market is too risky? Think again. There are many types of financial risk to consider, including the risk of not having enough savings when you retire and the risk that inflation will erode your money's spending power over time
Change course: While all investments involve risk and stocks can be volatile on a day-to-day basis, history shows that over the long-term they consistently outplace inflation.
From 1928 to 2015, the average annual return on the S&P 500 was 7%, adjusted for inflation, while the average rate of inflation was 3.22%, so for the past nearly nine decades, stocks have outpaced inflation by almost four percentage points. Also be aware that past performance is no guarantee of future results.