Finance
Here are some big money blind spots you need to avoid, advisors say
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Managing one’s personal finances can seem like a hodgepodge of never-ending checklists and rules of thumb.
With all sorts of financial considerations vying for attention — budgeting, saving, paying off debt, buying insurance, being savvy shoppers — 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 Advisor Council.
1. Credit scores
Consumers often don’t understand the importance of their credit score, said Kamila Elliott, CFP, co-founder and CEO of Collective Wealth Partners based in Atlanta.
The score impacts how easily consumers can get a loan — like a mortgage, credit card or auto loan — and the interest rate they pay on that debt.
The number generally ranges from 300 to 850.
Credit agencies like Equifax, Experian and TransUnion determine the score using a formula that accounts for factors like bill-paying history and current unpaid debt.
Lenders are generally more willing to give loans and better interest rates to borrowers with credit scores in the mid- to high-700s or above, according to the Consumer Financial Protection Bureau.
Let’s say a consumer wants a $300,000 fixed mortgage for a 30-year term.
The average person with a credit score between 760 and 850 would get a 6.5% interest rate, according to national FICO data as of April 1. By comparison, someone with a score of 620 to 639 would get an 8.1% rate.
The latter’s monthly payment would cost $324 more relative to the person with a better credit score — amounting to an extra $116,000 over the life of the loan, according to FICO’s loan calculator.
2. Wills
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Wills are basic estate planning documents.
They spell out who gets your money after you die. Wills can also stipulate who will take care of your kids and oversee your money until your children turn 18.
Planning for such a grim event isn’t fun — but it’s essential, said Barry Glassman, CFP, founder and president of Glassman Wealth Services.
“I’m shocked by the number of well-to-do families with kids who have no will in place,” Glassman said.
Without such a legal document, state courts will choose for you — and the outcome may not align with your wishes, he said.
Taking it a step further, individuals can create trusts, which can assign more control over details like the age at which children gain access to inherited funds, Glassman said.
3. Emergency savings
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Choosing how much money to stash away for a financial emergency isn’t a one-size-fits-all calculation, said Elliott of Collective Wealth Partners.
One household might need three months of savings while another might need a year, she said.
Emergency funds include money to cover the necessities — like mortgage, rent, utility and grocery payments — in the event of an unexpected event like job loss.
A single person should generally try to save at least six months’ worth of emergency expenses, Elliott said.
That’s also true for married couples where both spouses work at the same company or in the same industry; the risk of a job loss occurring at or around the same time is relatively high, Elliott said.
Meanwhile, a couple in which the spouses make a similar income but work in different fields and occupations may only need three months of expenses. If something unexpected happens to one spouse’s employment, the odds are good that the couple can temporarily lean on the other spouse’s income, she said.
Business owners should aim to have at least a year of expenses saved since their income can fluctuate, as the Covid-19 pandemic showed, Elliott added.
4. Tax withholding
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Tax withholding is a pay-as-you-go system. Employers estimate your annual tax bill and withhold tax from each paycheck accordingly.
“Ten out of 10 people couldn’t explain how the tax withholding system works,” said Ted Jenkin, CFP, CEO and founder of oXYGen Financial based in Atlanta.
Employers partly base those withholdings on information workers supply on a W-4 form.
Generally, taxpayers who get a refund during tax season withheld too much from their paychecks throughout the year. They receive those overpayments from the government via a refund.
However, those who owe money to Uncle Sam didn’t withhold enough to satisfy their annual tax bill and must make up the difference.
People who owe money often blame their accountants or tax software instead of themselves, even though they can generally control how much is withheld, Jenkin said.
Someone who owes more than $500 to $1,000 may want to change their withholding, Jenkin said. That goes for someone who gets a big refund as well; instead, they may wish to save (and earn interest on) that extra cash throughout the year, Jenkin said.
Workers can fill out a new W-4 form to change their withholding.
They may wish to do so upon any major life event like a marriage, divorce or birth of a child to avoid surprises come tax time.
5. Retirement savings
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“I think people underestimate how much money they’re going to need in retirement,” Elliott said.
Many people assume their spending will decline when they retire, perhaps to roughly 60% to 70% of spending during their working years, she said.
But that’s not always the case.
“Yes, maybe the kids are out of the house but now that you’re retired you have more time, meaning 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. That helps guide overall savings goals.
Households also don’t often account for the potential need for long-term care, which can be costly, in their calculations, she said.
WASHINGTON – The Federal Reserve on Wednesday lowered its key interest rate by a quarter percentage point, the third consecutive reduction and one that came with a cautionary tone about additional reductions in coming years.
In a move widely anticipated by markets, the Federal Open Market Committee cut its overnight borrowing rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022 when rates were on the move higher.
Though there was little intrigue over the decision itself, the main question had been over what the Fed would signal about its future intentions as inflation holds steadily above target and economic growth is fairly solid, conditions that don’t normally coincide with policy easing.
In delivering the 25 basis point cut, the Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The two cuts indicated slice in half the committee’s intentions when the plot was last updated in September.
Assuming quarter-point increments, officials indicated two more cuts in 2026 and another in 2027. Over the longer term, the committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update as the level has drifted gradually higher this year.
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”
“Today was a closer call but we decided it was the right call,” he added.
Stocks sold off following the Fed announcement while Treasury yields jumped. Futures pricing pared back the outlook for cuts in 2025 to one quarter point reduction, according to the CME Group’s FedWatch measure.
“We moved pretty quickly to get to here, and I think going forward obviously we’re moving slower,” Powell said.
For the second consecutive meeting, one FOMC member dissented: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous rate. Governor Michelle Bowman voted no in November, the first time a governor voted against a rate decision since 2005.
The fed funds rate sets what banks charge each other for overnight lending but also influences a variety of consumer debt such as auto loans, credit cards and mortgages.
The post-meeting statement changed little except for a tweak regarding the “extent and timing” of further rate changes, a slight language change from the November meeting.
Change in economic outlook
The cut came even though the committee jacked up its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than September. However, in the ensuing years the officials expect GDP to slow down to its long-term projection of 1.8%.
Other changes to the Summary of Economic Projections saw the committee lower its expected unemployment rate this year to 4.2% while headline and core inflation according to the Fed’s preferred gauge also were pushed higher to respective estimates of 2.4% and 2.8%, slightly higher than the September estimate and above the Fed’s 2% goal.
The committee’s decision comes with inflation not only holding above the central bank’s target but also while the economy is projected by the Atlanta Fed to grow at a 3.2% rate in the fourth quarter and the unemployment rate has hovered around 4%.
Though those conditions would be most consistent with the Fed hiking or holding rates in place, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had only risen “slightly” in recent weeks, with signs of inflation waning and hiring slowing.
Moreover, the Fed will have to deal with the impact of fiscal policy under President-elect Donald Trump, who has indicated plans for tariffs, tax cuts and mass deportations that all could be inflationary and complicate the central bank’s job.
“We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented,” Powell said of the Trump plans. “We’re just not at that stage.”
Normalizing policy
Powell has indicated that the rate cuts are an effort to recalibrate policy as it does not need to be as restrictive under the current conditions.
“We think the economy is in really good place. We think policy is in a really good place,” he said Wednesday.
With Wednesday’s move, the Fed will have cut benchmark rates by a full percentage point since September, a month during which it took the unusual step of lowering by a half point. The Fed generally likes to move up or down in smaller quarter-point increments as its weighs the impact of its actions.
Despite the aggressive moves lower, markets have taken the opposite tack.
Mortgage rates and Treasury yields both have risen sharply during the period, possibly indicating that markets do not believe the Fed will be able to cut much more. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed’s rate.
In related action, the Fed adjusted the rate it pays on its overnight repo facility to the bottom end of the fed funds rate. The so-called ON RPP rate is used as a floor for the funds rate, which had been drifting toward the lower end of the target range.
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