5 Habits That Will Inevitably Sabotage Your Finances

Dollar drainMoney is an important part of our lives. We buy what we need with it, we fund our future with it and we support others with it.

Unfortunately, there are a number of bad habits that can sabotage our financial well-being. Some of these habits won’t destroy our finances right away, but over time, we may find ourselves in a dire situation with little hope of recovery.

Let’s take a look at some of these bad habits and how you can avoid or conquer them as quickly as possible.

1. Smoking. According to the CDC, “Tobacco use remains the single largest preventable cause of death and disease in the United States.” Talk about bad for your finances and your health.

Let’s pretend for a moment that the only cost from smoking is what hits your wallet — not your lungs. OK, how much will you be spending?

Let’s say that a pack of cigarettes costs you $4.49 — although the price widely varies from state to state. And, let’s say you smoke two packs a day. That’s $8.98 a day.

There are 365 days in a year, so that’ll cost you about $273.14 a month. That’s a lot of money — especially when you figure that you could have invested that money. Let’s say you invest that amount of money every month for 10 years with an 8 percent annual return on your investment. You know what that comes to?

$51,280.92. Yeah, that’s serious money.

Another way smoking can hurt your wallet is with life insurance. A client was looking to obtain term life insurance from me and in the process I learned that he was a smoker. While I was shocked to find out I was even more shocked to seehow much more life insurance is for smokers. In his case, his life insurance policy was more than three times more expensive than someone that doesn’t smoke.

Remember, we’re just figuring in the cost of the cigarettes on your wallet. How about the health consequences? The cost of medical procedures and the lost opportunities when you’re on chemotherapy are staggering.

Avoid smoking. It’s one bad habit that kills more than your financial well-being.

2. Using credit cards irresponsibly. How many credit cards do you have in your wallet right now? Two? Five? Eight?

While it’s not necessarily a horrible thing to have credit cards, it is a horrible thing to use them irresponsibly. And, unfortunately, that can be easily done.

Sure, you can earn some pretty nice rewards by using credit cards on a regular basis. But remember, if credit card companies weren’t making money by giving away some money, they wouldn’t do it. That means that the average guy or gal can’t win by using credit cards. The average guy or gal would pay more in interest on their credit cards than they would make through the rewards programs. No good.

Okay, so you think you’re above average. That’s cool. You’re going to need to prove it by following one little tip. What’s the tip? I never thought you’d ask …

Pay off your credit cards every single month.

That’s right, before you use your credit cards, you need to make sure that you will be able to afford the bills that come every month. And really, for many people, the only way to do that is to get on a budget and make sure that you have the money before you spend it.

So if you’re going to use credit cards, get on a budget and pay off those credit card bills like clockwork. Get in the habit of doing the right thing with your money, not the wrong thing.

3. Eating out during your lunch breaks at work and making other small miscellaneous purchases. It’s just too easy to head down the street, swipe your card and get a meal. The problem is that it can end up costing you a lot of money.

Let’s say you spend $7.50 a meal four days a week. That could come to about $120 a month or $1,440 a year. That’s a lot of money, honey.

Keep in mind that eating out on your lunch breaks alone probably won’t kill your finances, but if you add to that getting your morning coffee at your favorite java joint, buying that bagel to go with it and picking up some candy bars after work, now it’s starting to look like a bad habit that will inevitably kill your finances.

Of course, this entire article is assuming you don’t have a money tree growing in your back yard (if you do, I recommend keeping it out of sight). If you’re the average American, living like the average American and making little purchases throughout the day just isn’t an option if you want to have a decent retirement and leave some money for your kids when you reach your final destination.

Don’t discount this tip. Entire industries thrive by selling low-cost goods. Don’t let these little expenses sneak up on you and destroy your financial situation.

There is some “good” news if you’re in the habit of making multiple small purchases every day. You know what it is? It’s that you probably won’t experience a sudden downfall due to your spending behavior. It will happen slowly over time without you realizing it. Perhaps that’s not such a good thing after all.

4. Buying a new car every couple of years. Every time I hear of a person buying a new car every couple of years, I almost roll my eyes. There are worse things, but not much is worse than forking over $20,000 every few years.

Driving older cars can save you so much money it can make your head spin. Now, I’m not recommending you drive something from the ’50s, ’60s or ’70s. Hitting your head on a metal steering wheel probably isn’t much fun — just saying. The cars I’m talking about driving are maybe five or 10 years old. These cars have depreciated enough and are safe enough to represent tremendous value in your life — especially to your finances.

Mechanics will tell you that new cars like hybrids and electric vehicles aren’t quite yet cost-efficient. Why? The batteries. When the batteries have to be replaced every few years, you might end up spending more than you’d save by not having to purchase gasoline. So next time you try to convince yourself that you “need” a new car because of the efficiencies involved, make sure to do your math first.

If you haven’t noticed, newer cars cost a whole lot more to cover with auto insurance than older cars. Plus, when you have newer cars, you’re probably going to be tempted to raise your comprehensive and collision coverage — and those coverages cost a pretty penny.

Be smart when it comes to vehicles. Your finances will thank you over time.

5. Winging it (financial planning) and hoping for the best. I have clients step into my office all the time to ask how much money they need to save every month for retirement. Do you think I tell them all the same thing? Of course not. How much they need to save depends on their current financial status, what the future holds, and their goals.

For example, I’d want to know how much money they think they could live on in retirement and then I’d need to account for inflation. Then we’d have to look at what they can expect from various investments from now until they retire and beyond. I’d also need to know about any major expenses that they have coming up. The list goes on and on.

True, you can drive yourself crazy accounting for every little data point in the process. But it’s certainly worth some exploration. After all, you don’t want to retire only to realize five years later you blew it by quitting your job.

That’s why I recommend meeting with a financial adviser who can help you create a financial plan. Now, I’m not just talking about investing, you’re going to need a professional who will help you look at the big picture.

It’s also worth your time to understand how financial advisers get paid. They need to demonstrate their value to you before you sign on the dotted line.

When it comes to financial planning, don’t wing it. Hire a professional, educate yourself, and make a plan.

By overcoming these bad financial habits, you’ll find yourself enjoying a healthier bank account and more time to do the things you want to do in life. Don’t let money rule your life — you tell it what to do.

Avoid These 5 Common Holiday Budget Pitfalls

Woman holding money and a red purseAccording to a recent survey from the National Retail Federation, holiday shoppers are planning to spend an average of $805 on gifts this holiday season. The same survey found that shoppers plan to spend an average of $463 on family members. That’s the highest this figure has ever been.

To make sure that you don’t overspend this year — no matter your target number — be sure to create a holiday spending budget. That way, you’re far less likely to find an unpleasant surprise when that credit card bill shows up in January.

Here are five things you shouldn’t do when planning your holiday shopping budget.

1. Don’t Let Guilt Break Your Budget

Maybe your sister-in-law buys your kids three gifts each. This doesn’t mean that you have to do the same for hers. If your budget calls for just one gift for your in-laws’ kids, stick to it. It’s easy to let guilt lead you to overspending during the holidays. But don’t feel like a scrooge because you aren’t spending as much as your other relatives. If your budget is tight this year, don’t break it in a misguided attempt to keep up with the spending of others.

2. Don’t Add Last Minute Gifts to Your Shopping List

When making a holiday spending budget, you’ll need to list the people for whom you want to buy a gift. As the season moves along, you might feel a temptation to start adding names. It’s one thing if you forgot to place Aunt Sally on the list — but it’s another if you decide at the last minute to buy a $25 gift card for the mailman.

The late additions of folks who aren’t friends or family members can quickly bust your holiday budget. Those small extra gifts — even if they’re $5 worth of lottery tickets — can add up. You are under no obligation to provide a gift for your dog sitter, mail carrier, or children’s karate instructor if you don’t have enough room in your holiday budget.

3. Don’t Count on a Holiday Bonus

You might receive a holiday bonus every year — but you still shouldn’t count on that bonus when setting your holiday budget. Instead, create a budget based on your normal monthly income. What if you overspend only to discover that this year your company is not passing out holiday bonuses? Suddenly, you’re in a financial hole. And if you do get your bonus as expected? It’s better to invest that extra money or use to it to pay off credit card debt than it is to spend it on holiday presents.

4. Don’t Just Go Through the Motions

Retailers want you to spend, spend, and spend some more during the holiday season. Your holiday budget should provide you with the blueprint you need to ignore this noise and spend only what you can afford.

Unfortunately, too many consumers make budgets but then never follow them. Once they spend more than they can afford, they turn to their credit cards. This is a huge mistake. If you put too much on your credit cards this shopping season, your holiday gifts will be long forgotten before you pay off your high-interest debt. When making a budget, actually do it in good faith. If you deliberately break your spending budget, what’s the point of even making one?

5. Don’t Forget Other Holiday Expenses

You might not overspend on anyone’s gift this year, but that doesn’t mean that you won’t break your holiday spending budget. The holidays encourage all manner of overspending. You might be traveling to visit relatives, which might require you to spend on hotels and gas. Maybe relatives will be visiting you, which means you’ll be spending more on food. Make sure to plan for these sometimes forgotten expenses when making your holiday budget. If you don’t, you might shatter it.

How to Invest Your Money the Way Warren Buffet Would Want

Fortune's Most Powerful Women Summit - Day 2
Warren Buffett, the Oracle of Omaha, is pretty much a one-man investing machine. If you’re going to follow anyone’s example of how to invest, it should be his. But with shares of Berkshire Hathaway trading at over $200,000 each, you can’t exactly hitch your star to his wagon. So how do you invest like Buffett in a way that makes sense for your budget, circumstances and family? Lend us your ear.

Don’t Pick Stocks

Of course, picking stocks is how Buffett made his fortune, but it’s not going to work for you. “If you’re not an expert at picking stocks, you have no business picking stocks,” says Maz Jadallah, founder and CEO of AlphaClone, a company that uses technology to help people invest wisely. He advises people who aren’t experts at picking stocks to throw their money into the S&P 500 (^GSPC) with a 10 percent cash cushion and leave it. “It’s so simple it takes your breath away, and that’s why it appeals to so many people.” It might not be as sexy as day trading, but it’s probably what Buffett himself would tell you to do. In fact, it’s what’s going to happen to his money after he dies.

“If you want to be a passive mutual fund investor, index funds are the place to be,” says Steve Wallman, CEO of Folio Investing. “They offer low fees and are reasonably diversified. You’re not going to knock it out of the park, but the S&P isn’t going to drop to zero like Enron stock.”

Still, Wallman admits that there are people who both want a higher return and want to be more engaged. Ultimately, what you can do depends on several factors, including your current income, projected income and responsibilities. Wallman notes the world of difference between a family where two people are working and earning a decent wage with no kids against the same income level with three kids and aging parents to support. In the former case, there’s more risk tolerance. In the latter, there’s less. “Should you be doing a little bit more or even a little less with your money?” he asks. “It depends on your circumstances.” Still, no matter what you decide, Wallman thinks you should have an index fund as part of your investment strategy.

Manager Selection Is Even Harder

“The biggest pain point is manager selection,” says Jadallah. Because even when you concede that you’re not the best person to manage your money, that doesn’t mean you know who the right person to manage your money is. AlphaClone’s entire business model is helping people to pick competent money managers based on their previous track records using current technology.

He points out that there are basically three problems when investing. Market risk is the risk of the overall market. This is an area where you have zero control. Company risk is the risk specific to the company your manager is investing in and can be mitigated by picking the right manager. Finally, there’s the manager risk, which is where the rubber meets the road. So look for a manager who isn’t putting all your eggs in one basket and knows how to mitigate market and company risk.

Don’t Go All Long or All Short

Jadallah says that one mistake people make is that they go “all long.” This means they put all their money into an exchange-traded fund that tracks an index like the S&P 500. And while Buffett is bullish on the ETFs, urging investors to put 90 percent of their money there, he also keeps a 10 percent cash cushion in the form of short-term bonds. For his part, Jadallah suggests that you increase that to 20 percent. “If the market has a 40 percent drawdown event, it takes years to recover,” he says. “You want to align with what the market is doing over a long-term trend.” Do that, he adds, while also having something to protect you in the event of a major drawdown event.

Find Funds that Are Diversified

One of the main reasons the S&P 500 is such a safe bet is that it’s diversified. “Having 10 airline stocks isn’t being diversified,” says Wallman. In fact, it’s an incredibly concentrated way of investing, but that doesn’t stop a lot of investors from investing primarily in tech, energy or other industry-specific stocks. Here you’re not getting much of the benefit of an index fund at all. You’re sharpening your overall market risks, because when you invest heavily in one specific industry, the entire economy doesn’t have to have a downturn — just the one that you’re in.

How to Get Financially Ready for a Power Outage

Palm trees at a hotel bend in the fierceExtreme winter weather has already arrived in some parts of the country: Parts of California have seen snow and more is expected. Some meteorologists are calling for a cold, snowy winter from coast to coast, and that means it’s time to get prepared.

According to tale of the ant and the grasshopper from Aesop’s Fables, the wise ant stored up food during the warmer months in preparation for winter, while the lazy grasshopper would only sing in the summer and found himself starving and begging for food come winter. Although the predictable change of seasons may not cause you personally to break the bank — unless it’s the holiday season — unexpected and severe weather emergencies can quickly leave you in a financial rut. In addition to severe cold, other weather emergencies such as thunderstorms, lightning, floods, hurricanes, tornadoes, extreme heat and drought can also pose major dangers to your health and bank account.

The National Oceanic and Atmospheric Administration and Federal Emergency Management Agency stress the importance of preparing for severe weather before it strikes. As a frugal shopper, the same strategy applies. Since controlling the weather isn’t possible, focus on what you can control: your preparation and finances.

Here are some simple tips to help you save money:

1. Look into tax-free incentives. Find out if your state has any tax-free holidays for emergency supplies and equipment.

States such as Alabama, Louisiana and Virginia have severe weather, hurricane or emergency preparedness tax-free weekends. Visit your state’s tax department website to see if there are any tax incentives offered in your area, as well aseligible items, which may include portable generators, batteries, cellphone batteries, fire extinguishers, flashlights, duct tape, first aid kits and more. Be aware that qualifying items vary by state and there may be price limits in place.

2. Stockpile non-perishables. Be sure to stock up your pantry with non-perishables by taking advantage of coupons and store promotions. Make sure you buy enough extra items to avoid the need to buy that item at full price before the next sale comes around. Using this strategy can help you gradually grow your emergency stockpile.

3. Save on water. Don’t want to spend an arm and a leg on bottled water? Simply drink tap water. Studies have shown that tap water may actually have more health benefits than bottled water, contrary to public opinion. To store tap water in preparation for an emergency, use plastic juice containers after cleaning them.

If you still prefer to buy bottled water at the store, wait for sales and promotions on the big name brands and use manufacturer coupons. A different strategy is to simply go for the generic, store-brand water, which can save you a bundle compared to the expensive name-brand at full price. Be sure to compare the unit price among the different water products and packaging. You’ll typically save more by buying a gallon of water than a pack of bottled waters.

4. Beat the mad dash to the store. Be sure to hit the grocery store before the masses. Once you catch wind about even the possibility of severe weather in the news, I recommend getting to the store quickly to grab any supplies that you direly need. You’ll have more selection and a better chance of purchasing the least expensive option or brand before the shelves are bare. Do this as early as possible. If you find yourself without much lead time, only go out to the store if you have adequate time and there is not an immediate threat. In other words, don’t drive out in the middle of a bad storm or leave your house during a tornado to grab a loaf of bread.

5. Build an emergency kit. Instead of buying an expensive, pre-assembled emergency kit, create your own by shopping for supplies you’d need in the event of a disaster. At the top of your list is water, at least one gallon of water per person per day, for both drinking and sanitation, as well as a minimum three-day supply of non-perishable food, including canned goods and shelf stable foods.

Make sure you have a flashlight, extra batteries, a first aid kit, moist towelettes, garbage bags, a battery-powered or hand-crank radio and other essential items your family will need in the case of an emergency. You can find a complete list of recommended supplies that should be included in a basic disaster supplies kit onready.gov.

As one of my friends likes to say, “Proper planning prevents poor performance.” This applies so well to emergencies and severe weather. To summarize: Have a plan, be the “ant” that stores up for the winter and unexpected storms and save money along the way.

5 Apps to Organize Your Financial Life

close up of woman hands with tablet pc and moneyLOS ANGELES — Earlier this year a tax pro mentioned the FileThis organizing app to me. Within seconds of installing it, I wondered, “Where has this been all my life?”

I have tried an absurd number of software programs that promised to simplify, streamline and de-clutter our family’s financial life. Most fell short, offering too little benefit, steep learning curves or both. A few insanely useful ones, though, made it to the mobile Hall of Fame, otherwise known as my home screen.

If you are trying to get a grip on your money, you may find these to be helpful:

1. FileThis. The app does what I frequently forget to do since going paperless several years ago — download account statements.

It also gives you an overview of your accounts and gives you bill due-date reminders.

I use FileThis’ free version to automatically fetch statements from up to six “connections” or links to financial institutions.

I have multiple accounts at each institution, so I am able to track far more than just six accounts. The free version offers 500 megabytes of cloud storage.

To get more connections and storage, you can pay $2 a month for up to 12 connections and 1 gigabyte of storage or $5 for up to 30 connections and 10 gigabytes of storage. Users also can opt to have documents downloaded to a number of other storage sites, including Dropbox and Evernote, or to their computers.

2. ItsDeductible. We donate a ton of clothes, toys, books and household goods to local charities, but I always put off attaching values to the donations until our taxes were due and it became a big, unpleasant chore.

The free ItsDeductible app from Intuit (INTU) allows me to record contributions as we make them and offers values for common items. I print out an annual report for our tax pro, although TurboTax users can download the information directly into their returns.

3. DropBox. Accessing files from any device or location is essential for my work, but cloud-based storage also helps when we travel and in preparing for natural disasters. So I regularly upload travel documents, insurance policies, appraisal reports, home inventories, scans of old tax returns and other important paperwork.

I used the free service for years but recently approached the 2 gigabyte storage limit and upgraded to 1 terabyte of storage for $99 a year.

4. Mobile banking. I dismissed mobile check deposit as a fad until I actually tried it. Now I agree with financial planner Michael Kitces, who calls it “a crucial aspect” of his financial life.

“The only time my wife or I have set foot in a physical bank branch for the past two years was to get a legal document notarized. It’s glorious,” said Kitces, research director at Pinnacle Advisory Group in Columbia, Maryland.

All the other stuff my bank app does — transfer money, pay bills, send alerts, find fee-free ATMs — makes this one of my most-used mobile money tools.

5. Mint. Intuit’s free personal finance aggregator allows its 2.5 million monthly users to track their spending, monitor their credit scores and spot potential fraud by automatically downloading transactions from bank, credit card and investment accounts.

It is also a favorite among financial advisers.

“Mint allows you to combine all of your finances into one location so that you can take a high level view,” said David Almonte, a certified public accountant in Providence, Rhode Island.

If you are an active investor, you might prefer Personal Capital, which has a better free portfolio manager. I liked Personal Capital’s elegant, ad-free dashboard. I didn’t like, however, being emailed and called about signing up for its fee-based investment advisory service, which is the site’s raison d’etre.

While some worry about security with aggregator sites where you have to hand over your account login credentials, I am comfortable with these sites’ privacy and security policies.

As the victim of several database breaches, including those at Anthem (ANTM) and Sony (SNY), I know that staying offline is no guarantee of safety. Too much of our private information is stored in insecure databases over which we have no control. With these sites, at least, I have some choice over what I share.

You’re Running Out of Time for Your 2015 Tax Planning

Person filling tax returns before deadlineA few months ago, we suggested getting your tax strategy together before it was time to panic.

Well, it’s time to panic.

We’re less than a month to the end of 2015 and any plans you have to lessen your tax hit by the end of the year should probably be implemented now. Rebecca Pavese, a certified public accountant, financial planner and portfolio manager with Palisades Hudson Financial Group’s office in Atlanta says that, at the very least, you should be calculating your income, tax payments and deductions to date, and estimating your totals for 2015.

“You need this baseline information before making any moves,” she says.

Once you’ve done that, the easiest way to save is by reducing your taxable income. Bankrate’s (RATE) Kay Bell notes that boosting your retirement savings can be particularly helpful. If you haven’t made your maximum $18,000 contribution 401(k) ($24,000 for people age 50 or older) or $5,500 contribution for an IRA ($6,500 for people age 50-plus), now is the time.

“If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford.

“If your employer permits you to make extra contributions to your 401(k), put in as much as you can afford,” says Bill Ringham, vice president and senior wealth strategist at RBC Wealth Management. “You typically contribute pretax dollars, so the more you invest, the lower your taxable income. Your earnings also grow on a tax-deferred basis.”

Ringham also notes that 529 plan contributions are tax deductible in several states, so contributing to your kid’s college fund will allow your earnings grow tax-free, provided they are used for qualified higher education expenses. Just make sure it’s going toward college, however, as distributions not used for qualified expenses may be subject to income tax and a 10 percent penalty. Meanwhile, it’s also time to take inventory of your other investments in 2015 … and root for the losers.”Tax-loss selling can minimize or eliminate capital gains on one asset by realizing a loss to offset it,” Pavese says. “There’s dollar-to-dollar offset. If for instance you’ve had $5,000 of capital gains, you can offset them completely with $5,000 of capital losses.”

The best part is that you can carry those tax losses forward indefinitely. If you don’t need those losses to offset capital gains right away, you can use the excess loss to offset gains in a future year. That’s particularly helpful since net capital losses (capital losses minus capital gains) can only be deducted up to a maximum of $3,000 in a given tax year. Any losses beyond $3,000 must be carried over, which also makes it worth your while to consider putting off selling some of your “winners” until next year.”

“Capital gains can increase your adjusted gross income — and, consequently, your tax bill,” Ringham says. “So if you are considering selling an asset that has increased in value, such as a stock, you may want to wait until January so the gain will be realized next year.”

If you’re in a really desperate situation, there’s also a chance you can just give some of those investments away. Highly appreciated stocks or mutual funds you’ve owned for more than one year can go directly to a charity, so if you’ve purchased shares for $1,000 and they are now worth $10,000, giving those share to a qualified charity would give someone in the 28 percent tax bracket a $2,800 tax deduction, based on the current market value of the donated shares.

“You benefit three ways,” Pavese says. “First, you’re doing good. Second, you won’t pay the capital gains tax you’d owe if you sold the security instead. And third, you’ll get a deduction if you itemize.”

Once all of that is complete, you’ll want to consider doing some housekeeping.

Bankrate’s Bell suggests homeowners submit January mortgage payment and property taxes by Dec. 31 so they can deduct the interest for 2015. Also, if you haven’t taken advantage of your flexible spending account for health care, now is a great time to schedule doctor’s appointments or buy eligible supplies ranging from glasses to knee braces to cold medicine. Pavese, meanwhile, suggests filing a new W-4 form with your employer and adjusting your December tax withholding just to keep from running afoul of penalties and interest. However, just about anything you can do to lower your adjusted gross income is helpful.

“Lowering your income has many potential benefits,” she says. “If you can lower your taxable income to below $74,900 for a married couple filing jointly or $37,450 for a single filer, you will pay zero percent federal tax on sales of assets you’ve held longer than one year and zero percent on dividends. Even if you can’t get your taxable income quite so low, you may be able to lower it enough to step down to the next lowest capital gains tax rate.”

Lowering income can also lower deduction hurdles that are calculated as a percentage of that income. For example, unreimbursed medical expenses can only be deducted if they exceed 10 percent of adjusted gross income, and investment expenses must exceed 2 percent. However, if you can’t adjust to a desirable level for 2015, now is the time to start banking deductions for 2016. Pavese suggests that, instead of paying your estimated quarterly state income tax by Dec. 31 and deducting it on your 2015 return, you can pay it Jan. 1-15 and get a 2016 deduction. Also, if an additional deduction would trigger alternative minimum tax, pay your fourth-quarter state income tax and real estate tax installment in January.

“If your bracket will go up next year, consider deferring certain deductions, such as state taxes and real estate taxes, so you can claim them on your 2016 return,” Pavese says. “The higher your bracket, the more the same deduction can save you.”