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Managing one’s personal finances can seem like a never-ending hodgepodge of lists and rules of thumb.
With a variety of financial considerations vying for attention—budgeting, saving, paying down debt, buying insurance, being a savvy shopper—consumers may inadvertently overlook some important nuggets.
Here are some of the biggest financial blind spots, according to several certified financial planners on CNBC’s Digital Financial Advisors Council.
1. Credit score
Consumers often don’t understand its importance said Kamila Elliott, CFP, co-founder and CEO of Collective Wealth Partners in Atlanta.
The score affects how easy it is for consumers to get loans, such as mortgages, credit cards, or car loans, and the interest rates they pay on those debts.
The quantity is generally between 300 and 850.
Credit bureaus such as Equifax, Experian and TransUnion use calculation formulas to determine scores factor Such as bill payment history and current unpaid debts.
Lenders are generally more willing to offer loans and better interest rates to borrowers with a credit score of 700 or above, according to Go to the Consumer Financial Protection Bureau.
Suppose a consumer wants a $300,000, 30-year fixed mortgage.
According to national FICO data as of April 1, the average person with a credit score between 760 and 850 will receive an interest rate of 6.5%. By comparison, someone with a credit score between 620 and 639 will receive an interest rate of 8.1%.
According to FICO, monthly repayments cost $324 more than someone with a higher credit score, which equates to $116,000 more over the life of the loan. loan calculator.
2. Will
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Wills are basic Estate planning documents.
They detail who gets your money after you die. A will can also specify who will care for your children and oversee your funds until they turn 18.
Barry Glassman, CFP, founder and president of Glassman Wealth Services, said preparing for such a grim event is no fun, but it is crucial.
“I’m shocked at the number of children from wealthy families who don’t have wills,” Glassman said.
Without such a legal document, he said, state courts will make the choice for you, and the results may not be what you want.
Going a step further, Glassman said, individuals can create a trust, which allows for more control over details, such as the age at which children receive inherited funds.
3. Emergency Savings
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Choose how much to save for one person Elliott of Collective Wealth Partners said financial emergencies are not a one-size-fits-all calculation.
One family may need three months’ worth of savings, another a year’s worth of savings, she said.
Emergency funds include money to pay for necessities such as mortgage, rent, utility bills, and groceries in the event of an unexpected event such as job loss.
Elliott said singles should generally try to save at least six months’ worth of emergency expenses.
The same is true for married couples where both spouses work at the same company or in the same industry; Elliott said the risk of job loss occurring at or around the same time is relatively high.
Meanwhile, couples with similar incomes but working in different fields and professions may only need three months of expenses. If something unexpected happens to one spouse’s employment, there’s a good chance the couple will be temporarily dependent on the other spouse’s income, she said.
Elliott added that business owners should aim to save for at least a year because their income can fluctuate, as the Covid-19 pandemic has shown.
4. Withholding taxes
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Withholding tax is a pay-as-you-go system. Your employer will estimate your annual tax bill and withhold taxes from each paycheck accordingly.
“Ten out of 10 people can’t explain how the withholding tax system works,” said Ted Jenkin, CFP, CEO and founder of oXYGen Financial in Atlanta.
Employers withhold taxes based in part on the information provided by employees on Form W-4.
Generally speaking, taxpayers who receive refunds during tax season have excessive deductions taken from their paychecks throughout the year. They received overpayments from the government through refunds.
However, those who owed money to Uncle Sam did not have enough money withheld to pay their annual tax bill and had to make up the difference.
People who owe money often blame their accountants or tax software rather than themselves, Jenkin said, even though they often have control over the amount withheld.
Jenkin said people who owe more than $500 to $1,000 may want to change their withholdings. The same goes for people who get large refunds; instead, Jenkin says, they may want to save the extra cash (and earn interest) throughout the year.
Workers can fill out a new W-4 form to change tax withholding.
They may want to do this in conjunction with any major life events, such as marriage, divorce, or the birth of a child, to avoid surprises at tax time.
5. Retirement Savings
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“I think people underestimate how much money they will need in retirement,” Elliott said.
She said many people assume their spending will decline in retirement, perhaps to around 60 to 70 percent of what they spent during their working years.
But this is not always the case.
“Yes, maybe the kids are away, but now that you’re retired, you have more time, which means you have more time to do things,” Elliott said.
She asks clients to envision how they want to spend their lives in retirement—travel and hobbies, for example—to estimate how their spending might change. This helps guide overall savings goals.
Families also often don’t consider the potential need for long-term care, which can be costly, she said.
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