Money Mistakes You Can't Afford to Make


How to avoid the five most common money errors women make.
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Putting Your Needs Last, Credit Card Debt, and Cashing Out Your 401(k)

1. Putting Your Own Financial Needs Last

Many women today face a double financial trap: funding their kids' college educations and saving for their own retirement. Most women put their children's education first. Bad move, experts say. While it's important to save for your children's education, there is more college financial aid available today than ever before. (To find out about loans and grants, visit www.collegeispossible.org or www.salliemae.com.) Because women receive only half the average pension and social security benefits men get, saving for retirement must be your top priority.

 

"The best thing you can do for your family is to be financially strong yourself so that you don't run out of money halfway through retirement," says Ginger Applegarth, a financial planner in Boston and author of Wake Up and Smell the Money (Viking Penguin, 1999).

Start by contributing the maximum amount possible to a 401(k) or other employer-sponsored retirement plan. If you aren't eligible for such a plan, contribute as much as you can to an Individual Retirement Account (IRA). For 2004, the allowable amount is $3,000 for those under age 50. If you're over age 50, you can contribute an additional $500.

2. Failing to Pay Off Your Credit Card Debt

The average American carries a credit card balance of more than $8,400. Thanks to steep rates -- typically 14 or 15 percent -- they end up paying more than $1,000 a year in interest alone.

Most consumers pay just the minimum monthly payments on their credit card bills. That means it takes them years to pay off the balance and puts them deeply in debt, say experts.

To reduce your credit card debt, limit the number of cards you use to just one or two. Shop around for a card with a low interest rate and no annual fee. (The Web sites AmericasLowestRates.com and Bankrate.com list credit cards with the best rates.) Pay your credit card balance in full whenever possible -- or, at the least, pay more than the minimum balance each month.

3. Cashing Out Your 401(k) When You Leave Your Job

Almost half of all Americans cash out their 401(k) balances when they change jobs rather than rolling over the money into another retirement account, according to a recent study conducted by Hewitt Associates, a management consulting firm. "Women tend to do this even more than men because they are more likely to leave the workforce temporarily when they have children," says Cindy Hounsell, executive director of the Women's Institute for a Secure Retirement, a nonprofit organization in Washington, D.C. As a result, women often leave a job at a point when they have only a modest amount built up in their 401(k), and the lower the balance, the more likely they are to cash out. The Hewitt study revealed that more than 42 percent of employees cash out their 401(k) balances when they change jobs. "Too often, women in their 20s or 30s look at the lump sum in their plan and decide retirement is a long way off, so they'll just put it toward paying bills or a down payment on a car."

Spending the amount you have in a retirement plan, rather than reinvesting it, shortchanges you in two ways. First, if you're under age 59 1/2, you'll pay an early-withdrawal penalty plus income tax on the money. Second, in the long term you lose even more because you forfeit the tax-deferred compounding of 401(k) earnings. For instance, with an average 8 percent annual interest rate over 30 years, a $5,000 balance would grow to more than $50,000.

You'll have the greatest flexibility in your investment choices if you roll over your balance into an IRA. You can also typically transfer the money to a new employer's plan.

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