Ignoring medical debt. Neglecting changes in your 401(k). Trying to beat the market with stock picking.
Turns out, financial pros make some pretty common money mistakes too. Forbes spoke with five financial professionals about the money mishaps in their own lives—-and the lessons they learned along the way.
Mistake: Ignoring Medical Bills You Can’t Pay
Samantha J. Anderson, CFP, once had unpaid medical debt that delayed her becoming a homeowner.
Photo courtesy of Lindsey Zitzke Photography
Samantha J. Anderson, now a certified financial planner in Columbus, Ohio, was in college in 2009 when she was hit with a $1,000 hospital bill she couldn’t pay. Scared and unaware of her options, Anderson put off dealing with the bill, hoping it would “go away,’’ she says. As she started getting calls from debt collectors, her stress skyrocketed—and her credit score tanked.
Paying off medical debt has become a common struggle for Americans, even those who have insurance, as deductibles rise and consumers get hit with “surprise medical bills” for out-of-network charges and other services they thought were covered. According to a survey last year by NORC at the University of Chicago, 57% of adults have been hit with such charges.
Surprise bills are most common when someone needs emergency treatment, a new analysis of data from the Kaiser Family Foundation shows. The situation is so severe, that Congress might even pass a bipartisan fix.
Meanwhile, those facing medical bills can sometimes win relief on their own. After the damage had already been done, Anderson looked on the back of her billing statements and found a number to call to reach the hospital’s financial assistance program. After speaking with a representative, she got part of the balance forgiven and started making payments on the rest.
Repairing her credit took more time. The bill being sent to collections pushed Anderson’s credit score down to around 600. To build up her score, she started making sure all her payments were on time and created an organizational system to help keep track and pay all of her bills.
Anderson felt the consequences of trying to ignore that medical bill even after it was paid off. When she and her husband first went house hunting in 2012, they had trouble getting qualified for the most favorable mortgage interest rates because of that poor mark on her credit report. They ended up waiting an additional two years to buy a home so that Anderson could fully rebuild her credit and they could borrow at the best rates.
Read more: Ready To Buy A House? Understand The Impact Of Your Credit Score First
Here’s yet another incentive to act quickly on a big medical bill: since medical debt has tanked the scores of so many responsible consumers, in 2017 the three major credit bureaus (Experian, TransUnion and Equifax) established a 6-month waiting period before medical debt appears in an individual’s credit history. The grace period is intended to give consumers enough time to correct any billing errors, resolve the debt or enroll in a payment plan.
Anderson is adamant about informing individuals of their options when it comes to handling medical bills they might not be able to pay in full or all at once.
“Definitely know that there is some sort of financial assistance program and don’t be embarrassed to use it because it’s there,” Anderson says. “If you do have debt, ask for help and don’t ignore it.”
Read more: 5 Ways To Increase Your FICO Score
Mistake: Front-loading a 401(k) Without Checking its Terms
Jonathan Bednar, CFP, says to always read the terms before front-loading a 401(k).
Photo courtesy of Colby McLemore
Front-loading a 401(k) means maxing out your contributions early on in the year. That way, you not only the get the tax deferred growth of your retirement savings started earlier, but also have bigger paychecks toward the end of the year. It’s an appealing idea, yet can sometimes backfire depending on the terms of your employer’s match.
Jonathan Bednar, a CFP and founder of Paradigm Wealth Partners in Knoxville, Tenn., personally advised his wife to front-load her 401(k). In late 2015, the company she was working for was acquired by another company. But Bednar neglected to read all the fine print in his wife’s new plan.
At the end of 2016, the couple reviewed their finances and realized she had not received the full 6% of pay employer match they were accustomed to. Why? Some employers provide a match based on your total contributions for the year, while others do so on a per paycheck basis—meaning that unless you have contributions taken out of every single paycheck, you won’t get your full match.
“After investigating the Summary Plan Description for the new company’s 401(k) plan, we learned they required you to contribute every pay period in order to receive the full match,” Bednar says. “Since she frontloaded her contribution in 2016, and we did not catch this until late 2016, she missed out on thousands of dollars in matching contributions.”
Bednar and his wife adjusted her 2017 contributions so she wouldn’t miss out on future match money. Now, whenever one of his clients changes jobs (or gets a new plan), Bednar looks for this gotcha in the 401(k) fine print.
In fact, even if you haven’t just switched jobs, now might be a good time to give your 401(k) a tune-up to make sure you’re getting your full employer match and taking advantage (if you can) of the new higher contribution limits for 2020.
Read more: 10 Money Moves To Make Before The End Of The Year
Mistake: Making a Big Impulse Purchase
Nick Holeman, CFP, almost made an impulse decision that would’ve cost him thousands.
Photo courtesy of Betterment
Nick Holeman, a CFP and head of financial planning at Betterment, identifies himself as “the frugal person” in his marriage and the one who handles most of the finances. Yet even he almost fell into the big impulse purchase trap.
A few years ago, Holeman admits, he was “dangerously close” to purchasing an original photo by renowned Australian photographer Peter Lik for nearly $6,000. His wife convinced him to go home and think about the purchase for a few days—and if she hadn’t, he says he would’ve “bought it on the spot.”
“Even CFPs have momentary lapses in judgment,’’ Holeman observes. “Looking back, I would have been extremely disappointed in myself for making that purchase, and would have felt literal pain every time I glanced at it hanging on the wall.”
Impulse spending has, no surprise, been well studied by behavioral economists. Turns out human beings (including smart ones) often have trouble controlling their impulses; we’re tempted by some immediate object of desire and don’t take the time to think about how it fits into our longer term goals.
But there are simple strategies that can help you avoid impulse purchases, including the common-sense one suggested by Holeman’s wife: give yourself a couple of days to think about the purchase first. Another important lesson Holeman learned from his near-impulse purchase, he says, is that “working together as a team with your spouse can help you avoid the big financial disaster decisions.”
“As the financial head of the household, it is often easy to dismiss your spouse’s ideas when it comes to money,” Holeman says. “It is important to not let that happen, and to see both sides of the story.”
Read more: 4 Tips For Budgeting With Your Spouse
Mistake: Taking on Debt to Keep Up Appearances
Anuj Nayar and his wife faced hefty credit card debt when they first got married.
Photo courtesy of Anuj Nayar
When Anuj Nayar started dating the woman who is now his wife 16 years ago, they spent a lot of late nights out in Boston together. At the time, however, Nayar didn’t know that she was taking on credit card debt to keep up.
Nayar and his wife’s courtship resulted in what he describes as a “black hole of credit card debt,” which nearly destroyed her credit score. Once they got married, her score was so poor that they couldn’t even purchase their first marital bed together—her credit score kept them from qualifying for major purchases.
Together, they took out a personal loan to consolidate her debt and pay it all off in a few years. Nayar says both of their credit scores are now in the 800s, and his wife’s is actually higher than his. Nayar now works for LendingClub, a popular online personal loan lender.
“That’s the #1 piece of advice for couples: To not carry any unhealthy debt,” Nayar says. “If you are revolving your credit cards for even a month, you have taken out a personal loan – it’s just a really, really bad one with most of your payments going to interest and not the principal.”
Read more: How Do Personal Loans Work?
There’s another lesson here too, even if Nayar doesn’t mention it: be sensitive to your friends’ financial limitations and behave accordingly.
Read more: How To Handle Having More Money Than Your Friends.
Mistake: Stock Picking, When You Don’t Have the Time
Andrew Chen is a chartered financial analyst who learned the hard way what can happen when you don’t … [+] invest in index funds.
Photo courtesy of Andrew Chen
Andrew Chen is a chartered financial analyst in San Francisco and worked in corporate finance before becoming a product manager at Google. But even he has slipped up with his own investing strategies.
In the past, Chen says he spent a great deal of time trying to invest in individual stocks, rather than taking a passive indexing approach to his investment strategy. As a result, his stocks took what he says was a “hard beating” with the financial crisis hit in 2008.
“I lost about one-third of my net wealth during the financial crisis,” Chen recalls. “I’ve since bounced back, but it was a sobering lesson in staying within your own swim lane.”
While Chen notes that individual stock investing isn’t necessarily bad, he realizes, in retrospect, that it wasn’t a good use of his time. If he had put money into index funds, he says he “would almost certainly be double-digit percentage-points wealthier by now.”
“Even though I used to work in investing myself, the reality is, when it comes to portfolio investing, unless you’re a full-time hedge fund analyst, there isn’t much point to individual stock picking,” Chen says. “Even full-time investors cannot realistically cover more than a handful of companies in any depth.”
Instead, Chen recommends investing in broad passive index funds because they are low-cost and don’t require much effort from the investor. And though index funds will fluctuate with the market, they’ll rebound and recover for those who have a long time horizon, he figures. Not investing in individual stocks also gives Chen more peace of mind; he doesn’t have to worry about an individual company’s performance regardless of the stock market’s overall health.
“I enjoy market-matching returns for zero effort and near-zero cost, and my portfolio and net wealth has grown by leaps and bounds because of it,” Chen says. “This is what I now recommend to all investors when it comes to investing!”
Read more: How To Create a 3-Fund Portfolio