By Elliot Raphaelson

In my column two weeks ago, I discussed some of the most common, and most damaging, mistakes investors make. They were: waiting too long to save, not diversifying your investments adequately, not rebalancing your portfolio, and hiring the wrong investment adviser.

This week I'd like to take a look at three common behaviors that get people into trouble or prevent them from maximizing their savings potential. I term them behaviors because they involve actions taken consistently every pay period or billing period that add up to big losses over time.

Paying the minimum due on credit cards

Financial institutions make it very easy for us to use credit cards. Even when many borrowers default on these cards, often because of high interest rates or fees, issuing credit cards is still a very profitable business. Too many consumers fall into the trap of paying only a minimum monthly payment and, as a result, watch their outstanding balances spiral upward at very high interest rates. The smart consumer restricts purchases to an amount that can be paid in full each month in order to avoid any interest charges. Think of it this way. If you buy a $40 sweater and don't pay the bill right away, making only minimum payments, the sweater may easily end up costing you $80 or more. Is the sweater worth $80 to you?

Not paying yourself first

As I emphasized in my previous column, it's important to start a savings program as soon as you start working. Too many people give priority to other expenditures first and only save if they have any money left afterwards. This approach inevitably leads to either no saving or insufficient saving. A forward-thinking consumer automatically saves a fixed percentage of his or her income -- every pay period -- before any other expenditure. This approach allowed me to retire in my 50s.

Passing up opportunities for tax-advantaged saving, especially when there's an employer contribution

Some employers offer employees a defined-contribution investment programs such as 401(k) accounts, in which employees can set aside a percentage of their salary in a tax-deferred investment. Some employers match a certain percentage of the employee's contribution. That's a deal that's hard to beat. For example, if your company matches 50 percent of your contribution -- that is, 50 cents for each dollar you put in -- that's an automatic 50 percent rate of return. In such a case, even if you have to struggle to make the maximum contribution, you should. It is almost impossible for you to obtain an immediate 50 percent rate of return on any other investment. Even if your employer does not match your contribution, it still makes sense to contribute as much as you can afford because your contributions are tax-deductible, and the income earned from this investment is tax-deferred.

You should also take advantage of other tax-advantaged investment programs, such as Individual Retirement Accounts (IRAs). If you have earned income, you will be able to contribute up to $5,000 a year. There are two advantages: First, your taxes will be reduced based on your tax bracket. If you are in the 28 percent bracket, your taxes will be reduced by $1,400. Second, all of the earnings on your investment are tax-deferred.

If you made a $5,000 investment each year for 45 years, and obtained an 8 percent average return, your investment would be worth more than $2 million. This example illustrates two very important points: the value of tax-sheltered investments, and the power of compound interest over an extended time frame.

In my experience, people who take full advantage of tax-advantaged investments invariably have a very secure retirement plan in effect. Their success is based less than you might think to savvy or luck; rather, it is the result of consistent and prudent behavior.

Available at Amazon.com:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back

Happy at Work, Happy at Home: The Girl's Guide to Being a Working Mom

 

Personal Finance - One Key to Secure Retirement: Consistent and Prudent Behaviors

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