Sometimes we think we're doing our finances well when those money-saving behaviors are really compromising the security of our savings. Sure, you know that following a budget and regularly depositing money into a savings account will build up a nice buffer in case you fall on hard times, but are you also doing things that could potentially put a big hole in that safety net?
Below are some of the behaviors that might appear to be beneficial to your bank account at first glance, but are really setting it up for a big loss:
1. Holding onto that low-interest account.
Yes, your account may not be earning anything, but certainly you aren't losing money, and at least it's safe in the bank, right? Well, if your money is sitting in a low-interest deposit account, you are, in fact, losing money.
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Inflation is the gradual increase in the cost of goods and services year over year. So if the inflation rate is 2 percent, for example, an item that costs $1 today will cost $1.02 in a year. That also means that if your savings aren't growing at the same rate, that money is essentially losing value each year. It's tough to find interest-bearing savings accounts that match the rate of inflation these days, but keeping your money in one that earns little-to-nothing at all guarantees your future purchasing power will be decreased by that much.
2. Loading up on company stock.
Companies often offer employees stock options as an added perk, and for many, company stock makes up 20 percent, 50 percent, or even more of their retirement portfolio. After all, it's essentially free money.
Current and former Facebook employees will tell you that holding onto their company's stock was the smartest financial move they could have possibly made. Those who used to work at Enron might disagree with that sentiment.
Consider how much of your financial stability is dependent on your employer--you'd probably be in a tough spot if you lost that paycheck, but your retirement savings too? Banking your nest egg on the future success of your company puts your financial well-being in a very precarious position.
Most financial advisors won't recommend allocating more than 5 percent of your money toward any one investment. If you really love your company and believe its value can only be headed upward, never let your stake in company stock exceed 10 percent of your total portfolio.
3. Exceeding the FDIC limit.
In your effort to amass impressive savings, make sure you're spreading the wealth across more than one bank if necessary. Most people are well aware that FDIC insurance covers deposits of up to $250,000 in most cases; what they often don't realize is that this limit is per depositor, not per account. That means if you have several savings, CD, money market, or other deposit accounts with one bank, any amount of the combined total balances that exceeds $250,000 is unprotected in the event that bank goes under.
4. Contributing too much to your 401(k).
When it comes to saving for retirement, the more you can sock away now, the better, right? Not necessarily. While making retirement savings a priority is great, you have to remember that you won't be able to touch the money you contribute to a tax-advantaged retirement account for a long time--maybe several decades--without paying severe penalties (except in the case of proven, extreme financial hardship), although you can borrow against it.
[Related: The Retirement Savings Move Tax Pros Love]
Experts recommend that you set aside 10 to 20 percent of your total earnings for retirement--and for many, the bulk of that savings goes into an employer-sponsored 401(k). The maximum annual contribution for an individual this year is $17,000, which means that unless you earn at least $85,000 per year, much more than the recommended 10 to 20 percent of your income is being locked into that account.
If you can afford to max out your 401(k) contributions every year, that's great--keep doing it. However, you shouldn't do so if your daily finances feel strained as a result or you're failing to pay down high-interest debt. Over-commit to your retirement now and your personal savings will suffer as a result; hit a financial rough patch and they'll likely be depleted quickly.
Including savings in your budget is the foundation to setting yourself up for a lifetime of financial success, and it takes real discipline to stick to it. Make sure you aren't undermining your hard work by doing things that can ultimately put your savings at risk.
Casey Bond is editor-in-chief of www.GoBankingRates.com, which provides readers informative personal finance and investing content, as well as the best interest rates on financial services nationwide.
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