By Consumer Reports
12:25 PM CST, January 2, 2013
A widowed mother of two nearly lost out on $100,000 because her husband failed to update the beneficiary designations on his retirement plan after they married.
Not updating wills and beneficiaries is one of the “7 money stumbles to avoid” featured in the February issue of Consumer Reports.
“Nobody’s perfect. Everyone makes money mistakes, and some might be unavoidable in times of financial distress,” said Tobie Stanger, Consumer Reports senior editor. “But missteps or miscalculations can cost you a lot over the long term or inadvertently hurt your family when you’re gone.”
Consumer Reports conducted a nationally representative survey about Americans’ money habits and uncovered several common and insidious blunders that could cause significant financial, and sometimes emotional, pain.
Only 36 percent of homeowners told us they’d purchased replacement-cost coverage, a more expensive homeowners insurance that provides replacement of your home with like kind and quality materials. And only 20 percent have umbrella coverage against liability claims.
Since settling their claim, the couple sold that property and bought a new home nearby. Now their homeowners policy includes coverage for inflation protection and to rebuild up to code. To reduce their premium, they’ve raised the deductible to $1,000 per incident from $500. They have a separate, state-sponsored wind and hail policy, with a deductible of 2 percent of the home’s insured value when the loss is caused by a hurricane.
The couple also bought federal flood insurance, at about $350 a year, though their home is not considered to be in a flood-prone area. The Federal Emergency Management Agency estimates that more than 20 percent of all flood claims arise outside of high-risk areas.
Two other coverages that should not be overlooked are life and disability insurance. Term life insurance is more economical than other types. Planner Losey says working parents of young children should buy at least 10 times their incomes, but he and planner Blayney recommend talking to a certified financial planner for a more sophisticated estimate. Use an online broker such as Accuquote, SelectQuote, FindMyInsurance, or LifeInsure.com to compare premium quotes.
Your income is your most important asset, but injury or illness could put it at risk. So if your employer offers supplemental long-term group disability insurance, buy it. A supplemental group policy that raises coverage to 70 percent of income from 40 percent could cost you on average $150 to $200 a year, says the Council for Disability Awareness, an industry group.
But most Americans don’t save even half that much. Among our survey respondents only 29 percent had an emergency fund that could cover three to six months of expenses. In a period of prolonged unemployment, that cushion could be a lifesaver.
Saving a bit at a time—say, $20 a week—can help build your cash buffer. That money should go into an accessible bank or credit-union savings account.
Given that identity theft is the fastest-growing crime in the country, we think that’s a mistake. Consider what we heard from a North Carolina doctor who discovered that her office manager had embezzled at least $500,000 from her practice by using, among other ruses, credit cards taken out in the practice’s name. The doctor and her husband later realized that they could have stopped the fraud if only they had checked their free credit reports. But because they hadn’t needed to borrow in years, they never bothered.
Worse, 13 percent said they paid only the minimum due each month. That’s a strategy that could chain you to your debt for decades. Assuming an interest rate of 18 percent, it’d take 24 years to pay off a $2,000 debt with minimum payments.
To begin to free yourself from that balance, consider consolidating your debt with a home-equity line of credit; rates on HELOCs average between 4 and 5 percent, according to Bankrate.com. If you don’t own a home or lack sufficient equity or income to qualify for a HELOC, consider transferring your balance to a lower-cost card. Many cards offer 0 percent financing on balance transfers for 12 to 18 months, after which the rate will jump to between 12 and 22 percent. You also might have to pay a fee of 3 or 4 percent of the balance up front.
Focus on retiring your debt by paying more than the minimum due each month. To that end, put the entire amount you’ll need each month to pay down your credit cards into a separate bank account so that you’re not tempted to use it for something else. You can even arrange for the sum to be direct-deposited from your paycheck.
Jim Henry, 70, a retired health-care executive from Jacksonville, Fla., says he began employing his form of debt management 23 years ago. Burned by a bad business deal and sitting on $50,000 in credit-card debt, Henry began tracking his family’s spending to bring their finances back from the brink. Within about four years he had eliminated the credit-card debt—and he hasn’t kept a balance since. Today, he estimates his net worth to be “north of $1 million.”
Just 35 percent of our survey respondents say they have a budget, but maybe more ought to. “When I look back, it helped me keep an eye on where I was financially,” Henry says. “If you just stick to basics and common sense, you can be OK.”
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