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5 Common Money Mistakes

From paying fees to missing floats, here's how to keep extra cash in your wallet

by: William J. Lynott, from: AARP Bulletin, November 24, 2010

En español | Managing personal finances is far more difficult than it was a generation ago. Here are five common mistakes that can trip you up:

1. Allowing a bank CD to roll over automatically

Banks love customers who allow their CDs to roll over automatically at maturity, but people who do that are making a mistake. How so? Banks often run special promotions offering interest rates higher than their regular rates, but you can be certain that an automatic renewal won't get a promotional rate. Take the time to call or visit the bank when you have a maturing CD, and be sure to ask if there are any current promotional rates.

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2. Failing to recognize the differences between debit and credit cards.

When you use a debit card for a purchase, you must already have the money in your checking account. That means no grace period for paying your bill; the bank deducts the money from your account immediately each time you use it. Also, it's easy to misplace a receipt and forget to note the transaction in your check register. That can result in overdrawn accounts and penalties for insufficient funds.

On the plus side, paying by debit card is quick and easy and avoids interest charges. However, you pass up the advantage of using the "float."

When you use a credit card and pay your full balance each month, you have up to 30 days of free use of someone else's money. You're taking advantage of the period between the purchase date and when the money is actually withdrawn from your account. In financial circles that's known as using the "float."

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3. Buying life insurance as an investment

In general, life insurance can be divided into two categories, term insurance and whole life insurance.

With term insurance, all your heirs get is the stated death benefit; it's never sold as an investment. If you determine that you need life insurance, a simple term policy may well be your best choice. It would cost much less than whole life.

Whole life insurance, also known as permanent or cash value life insurance, not only provides the stated death benefit, but includes an investment feature, known as the cash value. The major advantage of whole life insurance as a retirement investment is its tax treatment of the increasing cash value, sometimes known as the cash surrender value — the amount paid out if the policy is surrendered before death.

If a whole life policy is held until death, no tax is ever paid on these earnings. If the owner ever needs funds prior to death, he or she can borrow against the cash value from the policy rather than cashing it in. That way, the cash value continues to avoid taxation.

If you are in a high tax bracket and have a long time until retirement, whole life insurance may be appropriate for you. However, the high fees and expenses of whole life make it difficult to compete with the returns of other forms of investments.

4. Paying your income taxes by credit card

If you're short on cash, it's a tempting suggestion: Postpone paying Uncle Sam until your credit card bill arrives, then pay off the bill in installments.