10 Things You Might Not Know About Your Money

Money Misconceptions

You might think you have a good handle on your finances, but there are several common money misconceptions that could be costing you. From the value of your car and home to the worth of your nest egg, what you assume you know about your money might not actually be true. To make sure you’re accurately estimating your financial situation in 2012, MainStreet spoke to experts for some insight. Here are 10 financial miscalculations, mistakes and little-known truths to watch out for. Photo Credit: Getty Images


You Don’t Have Enough Saved for Retirement

Retirement ads often show older people sprawled out on the beach with piña coladas in hand, but many Americans never get to experience that type of end-of-life leisure due to poor retirement planning. “People don’t like to hear this, but you need about eight to 12 times what you make in a year for retirement to maintain your lifestyle,” says Peter D’Arruda, president of Capital Financial Advisory Group in Cary, N.C. That means if you’re used to living off of $80,000 a year, you should have at least $700,000 in your retirement fund, he explains. “The main problem is people are so used to getting that salary from the company and don’t realize how much they’ll have to take out of their bank account or 401(k) when they retire just to keep their standard of living what it was before,” D’Arruda says. “I’ve unfortunately had to deliver some bad news to people.” Photo Credit: Getty Images


Your Home Isn’t Worth What You Think

Despite the lackluster economy, homeowners often assume their home can sell at a higher price than what it’s actually worth these days. “Most people want to believe their home is worth a lot more than it might truly be in the current market,” says Paul Wyman, regional vice president of the National Association of Realtors. According to data from Zillow.com, national home values in November 2011 were down 4.6% from November 2010, and remained essentially flat when compared to October 2011. And experts are mixed on whether home prices will rebound in 2012. According to Zillow Chief Economist Stan Humphries, “… look for 2012 to be a transitional year in which home values fall modestly followed by a prolonged period of flat home values. We’re still three to five years away from ‘normal’ housing market conditions.” To ensure that you get the highest bid from buyers even in these less-than-stellar market conditions, always present your home in the best possible light. “First impressions are everything, so we tell people to make sure the outside of the home is tidied up, and on the inside you want to have a neat, clean appearance, so doing some fresh painting and de-cluttering is a good idea,” says Wyman. “You should also make sure your home is in good working order, so make sure windows are sealed and the furnace or air conditioner works right.” Photo Credit: Getty Images


You Could Get More Financial Aid

Many families struggle to pay their child’s tuition on their own due to the rising costs of higher education. But when it comes to securing aid, families often go after the wrong type, says Mark Kantrowitz, publisher of the financial aid websites Fastweb.com and FinAid.org. “Families often overestimate eligibility for private scholarships and underestimate eligibility for need-based financial aid,” he says. “I often hear from parents who assume that their child will be able to get a completely free ride through scholarships, but there’s a lot of competition. Scholarships may be part of the plan for paying for college, but not the entire plan.” Often parents also don’t realize that if they have multiple children in college, their chances may be greater for getting need-based financial aid. “It’s not uncommon for a family to get little aid when their first child is in college, but then get a lot more when they have two children in college at the same time,” Kantrowitz says. “Occasionally the family says ‘why bother’ the second year, not realizing that they would have qualified for a lot more aid.” If you’re new to the Free Application for Federal Student Aid (FAFSA), check out this recent MainStreet roundup of 11 essential tips to get the most financial aid possible. Photo Credit: Getty Images


Your Car Is Worth Less Than You Realize

Your car may be one of your most prized possessions, but the value you see in it doesn’t necessarily reflect its true price tag. “We have found that consumers will often overestimate the value of their vehicle,” says Alec Gutierrez, senior market analyst of Kelley Blue Book. “Only 3% of all used vehicles are estimated to be in excellent condition, but we have found that approximately 32% of visitors to [our website] kbb.com select ‘excellent’ as their assumed vehicle condition.” Gutierrez adds that cars need to be “nearly immaculate” to be considered in excellent condition, which includes having brand new tires, no mechanical defects, perfect glossy paint and all service records available. It also may come as a surprise to some that the premium package you purchased when your car was new, such as unique stitching or interior colors and upgraded leather interiors, might be worth significantly less on a used vehicle. “Consumers should never expect to recover 100% of the original purchase price on any specialty equipment or packages they purchase when the car is new – instead, expect to lose at least 50% of the value after just a few short years,” says Gutierrez. To find out how much your car is really worth, visit kbb.com to answer questions about your car’s year, make, model and mileage, or check out the Trade-In Marketplace via AutoTrader.com to get a trade-in quote that is good at any number of participating dealers (though Gutierrez tells us that this offer “is a liquidation value that will likely be lower than what a consumer may be able to obtain by selling the vehicle privately”). Photo Credit: Getty Images


You’re Asking for the Wrong Salary

Do you know how much you’re worth as an employee? It’s possible that the salary you’re asking for isn’t quite right. “Some job seekers overestimate their salary worth, but there are also those who underestimate their worth,” says Ryan Hunt, corporate communications manager for CareerBuilder. The trick is to do your research before you negotiate your salary with a new company or ask for a raise from your current employer. “Industry, job level, cost of living and labor pressure all factor into salary levels,” says Hunt.  “Job seekers should know the national and local averages for the job title weighed against their personal experience level and salary history.” There are a variety of free resources available to help you determine how much you’re worth. You can calculate averages for your position at CBSalary.com, or research salary by company, job title, location and years of experience at Glassdoor.com. Photo Credit: Getty Images


You Don’t Have the Right Life Insurance, or Enough of It

When it comes to life insurance, D’Arruda of Capital Financial Advisory Group says there are two big problems he often sees: “People either don’t have enough life insurance, or they have the wrong kind of coverage.” How much do you actually need? D’Arruda says you should have about eight to 10 times what you’re used to making in a year for your life insurance policy. As for the type of life insurance to choose, D’Arruda says there’s no “one size fits all” policy, and you should work with an expert to figure out which type is right for you since there are pros and cons to each. For instance, term insurance is a popular choice in which you pay a fixed amount each month for a specified period. The downside is that when the term is up, your coverage ends, which means you could end up losing money if you’re still alive and well. “The problem with term insurance is that most people don’t die during the term and never get paid,” he says. “Also, term is cheap when you’re young, but when you get older and the term comes up for renewal, it gets much more expensive.” If you're looking for long-term coverage, D’Arruda recommends considering a universal policy, a type of flexible permanent life insurance in which premiums are paid into your policy’s account value where it earns interest. Rates never increase as long as you pay your premiums, he says, and you also have the ability to take out loans or make withdrawals from the account value. And unlike whole life insurance, another type of permanent coverage, you can adjust the death benefit and change the amount and timing of premium payments. An example of when it might benefit you to take out cash from your universal policy is in the case of long-term care. “If you have a universal policy and you don’t have long-term care insurance, you can reach into your life insurance policy and have them give you some of that death benefit ahead of time to help pay for your care,” D’Arruda says. Photo Credit: Getty Images


You’re Missing Tax Breaks

If you haven’t been happy with your tax returns, it could be because you’re not taking advantage of tax credits available to you. “People often underestimate their deductions,” says Kelly Erb, a tax attorney known as TaxGirl. “I think if people were more organized and prepared and knew what deductions were allowed to them, they’d actually have a better return.” For instance, charity contributions, medical and dental costs and employee business expenses can often be written off (for more details, including criteria, check out this MainStreet roundup or visit the IRS website). To get the most from your return, Erb suggests staying informed – “the tax code is changing every couple of months now, so credits that might be available today aren’t available tomorrow.” It’s also a good idea to stick with a consistent tax preparer. “This way, that person knows your ongoing situation,” Erb says. “So if you claimed two dependents last year but one is now in college, for instance, they’ll tell you that you get a tuition credit.” Photo Credit: Getty Images


You Don’t Have an Estate Plan

Think an estate plan is only for the rich? Think again. “All adults should have an estate plan in place,” says Karl Byrd, executive vice president of Security Ballew Wealth Management in Jackson, Miss. “Obviously estate plans can be very complicated in large estates with multiple business interests and trusts. But whatever your assets are – the car, the house – you still want to make certain they go to the right person.” Another common misconception is that young adults don’t need to put an estate plan in place until they get older. The truth is that no matter what your age, if you want your assets properly passed on to the people and organizations you care about, you shouldn’t procrastinate. “It’s easy to put off estate planning – everyone thinks they’re bulletproof – but there’s no time like the present,” Byrd says. Photo Credit: Getty Images


You’re Overestimating Your Credit Score

You might assume that you have excellent credit, but don’t be so sure. "People often think that their score is actually higher than it is, partly because credit score formulas are very complex and people don’t know how different factors weigh in,” says Adrian Nazari, CEO of Credit Sesame. For instance, paying your balance in full each month doesn’t guarantee a high score. In fact, spending more than 30% of your limit could actually hurt your score, even if you pay it all off on time. So if you, for instance, have a $4,000 limit and you pay off a $2,000 balance each month, call your issuer to ask for a higher limit so that your balance doesn’t exceed 30% of the limit. You also might think that cutting up an old credit card can help improve your score, but it could actually have the opposite effect. “Because credit scores look at credit history and utilization, cutting up or canceling the account could negatively impact your score,” says Nazari. “If you have an old card, keep it and save it for a rainy day.” To find out more about what affects your credit score, check out this MainStreet roundup debunking eight common credit myths. Photo Credit: Getty Images


Fees Eat Away at Your 401(k)

Did you know that your 401(k) plan is laden with fees? Don’t feel bad if you weren’t aware – the fees are not disclosed on your 401(k) statements, though that will soon change through new federal disclosure regulations. According to the Department of Labor, 401(k) fees generally fall into three categories: administration fees, which fund day-to-day administrative services such as recordkeeping, accounting, legal and trustee services; fees for investment management and other investment-related services; and individual service fees, which are associated with optional features under a 401(k) plan, such as taking out a loan from the plan. “In terms of cost, fees can range anywhere between 0.75% all the way up to more than 2%,” says Andrew Meadows, consumer & brand ambassador at The Online 401(k).  “Even for folks who think they’re on top of things and do the research and check their statements diligently, the truth is that those balances don’t reflect what is coming out for management fees.” The good news is that in April of this year, new federal regulations will take effect that will require that fees be disclosed on plan statements. “The regulations haven’t been spelled out in too much detail, but all providers are expecting these regulations and all are expected to comply,” says Meadows. Photo Credit: Getty Images


Money Advice Gone Wrong

What’s the worst money advice you’ve ever received? MainStreet asked six Americans to share their stories to help pinpoint mistakes we can all avoid. Here’s what they had to say, along with insight from professional financial experts. Photo Credit: Getty Images


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Kristin Colella is a writer/editor for MainStreet. You can follow her on Twitter at @KrisColella. And if you haven't already, now is a great time to follow MainStreet itself on Twitter. You'll get all of our most important stories, right as they publish. Follow us @mainstr! Photo Credit: clevercupcakes


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