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.
Sign up for the AARP Money Newsletter.
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 You're taking advantage of the period between the purchase date and when the money is actually withdrawn from your account.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."
But there's a catch — a big one: When you pay your taxes by credit card, you'll be charged a fee by the IRS. This "convenience" fee amounts to about 2.4 percent of the amount you're paying. If you owe $2,000, the fee will be about $48. Put a $10,000 tax bill on your credit card and you'll be hit with a fee of about $240.
Further, if you can't pay off the balance in full when you get your credit card bill, you'll wind up paying the oppressive interest charges levied these days by card issuers.
What's worse, paying your taxes by credit card could be a red flag to your card issuer. If it appears that you're having financial problems, it could raise your interest rate or lower your credit limit.
The bottom line: Don't do it. Almost any other way to come up with the money you need for your tax payment will be cheaper than using a credit card.
5. Borrowing money from your retirement accounts
Almost all 401(k) retirement plans contain a provision that allows you to borrow money from them, but that does not mean that you should do it. Borrowing even a small amount of money from your retirement plan can rob you of tens of thousands of dollars in lost retirement income.
Any money you borrow from your account will no longer be drawing tax-deferred interest during the period of the loan — and that lost interest could itself be drawing interest.
One of the most valuable things you have going for you as an investor is the awesome power of compounding interest. Your interest earns interest, and that's what makes it possible to double your money every nine years or so, depending on current interest rates. Borrowing money from your retirement plan stunts the magic of compound interest.
You'll also pay a fee if you borrow from your 401(k). It costs the company something to set up the loan, track payments and comply with government regulations. The investment company that sponsors your program will not do this for free.
If you take out the money as a loan and pay it back within the time limit, generally five years, there will be no IRS penalty fee. However, if you take out your money as an early withdrawal before age 59 1/2, you'll be hit with an additional 10 percent early withdrawal penalty. Borrowing money from your 401(k) plan may be an easy option, but it should be considered only as a last resort.
William J. Lynott is an author and freelance writer who specializes in business and financial issues.