Here are some big-money blind spots to avoid, advisers say

Managing one’s personal finances can seem like a hodgepodge of endless checklists and rules of thumb.

With all kinds of financial considerations competing for attention – budgeting, saving, paying off debt, buying insurance, being savvy shoppers – consumers may inadvertently overlook some important things.

Here are some of the biggest financial blind spots, according to several certified financial planners from CNBC’s Digital Financial Advisor Council.

Consumers often don’t understand the importance of their credit score, says Kamila Elliott, CFP, co-founder and CEO of Collective Wealth Partners based in Atlanta.

The score affects how easily consumers can get a loan – such as a mortgage, credit card or car loan – and the interest they pay on that debt.

The number usually ranges from 300 to 850.

Credit bureaus such as Equifax, Experian and TransUnion determine the score using a formula that takes this into account factors such as bill payment history and current unpaid debts.

Lenders are generally more willing to make loans and better interest rates to borrowers with a credit score in the mid to high range, 700 or higher. according to to the Consumer Financial Protection Bureau.

Let’s say a consumer wants a fixed mortgage of €300,000 with a term of 30 years.

The average person with a credit score between 760 and 850 would face an interest rate of 6.5% starting April 1, according to national FICO data. By comparison, someone with a score of 620 to 639 would get an interest rate of 8.1%.

The latter’s monthly payment would cost $324 more compared to the person with a better credit score – amounting to an additional $116,000 over the life of the loan, according to FICOs. loan calculator.

Wills are basic estate planning documents.

They indicate who gets your money after you die. Wills also allow you to determine who will care for your children and oversee your money until your children turn 18.

Planning such a grim event isn’t fun, but it’s essential, says Barry Glassman, CFP, founder and president of Glassman Wealth Services.

“I’m shocked at the number of wealthy families with children who don’t have a will,” Glassman said.

Without such a legal document, state courts will side with you — and the outcome may not match your wishes, he said.

Taking it a step further, individuals can create trusts, which can provide more control over details such as the age at which children can access inherited funds, Glassman said.

Choosing how much money to set aside for a financial emergency isn’t a one-size-fits-all calculation, says Collective Wealth Partners’ Elliott.

One household might need three months’ savings, while another household might need a year, she said.

Emergency funds include money to cover necessary needs, such as mortgage, rent, utility, and grocery payments, in the event of an unexpected event such as job loss.

A single person should generally try to save at least six months of emergency expenses, Elliott said.

This also applies to married couples where both spouses work for the same company or in the same industry; the risk of a job loss happening at or around the same time is relatively high, Elliott said.

Meanwhile, a couple whose spouses earn similar incomes but work in different fields and professions may only need three months’ worth of expenses. If something unexpected happens to one spouse’s employment, there’s a good chance the couple will be able to rely on the other spouse’s income temporarily, she said.

Business owners should aim to save at least a year’s worth of expenses as their income can fluctuate, as the Covid-19 pandemic has shown, Elliott added.

Tax withholding is a pay-as-you-go system. Employers estimate your annual tax bill and withhold taxes from each paycheck accordingly.

“Ten in 10 people couldn’t explain how the tax withholding system works,” says Ted Jenkin, CFP, CEO and founder of Atlanta-based oXYGen Financial.

Employers base these deductions in part on the information employees provide on a W-4 form.

In general, taxpayers who receive a refund during tax season are withholding too much from their paychecks throughout the year. They receive the excess payment from the government through a refund.

However, those who owe money to Uncle Sam haven’t withheld enough to pay 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. This also applies to someone who gets a large refund; instead, they may want to save that extra money (and earn interest on it) throughout the year, Jenkin said.

Employees can complete a new W-4 form to change their withholding.

They may want to do this for every major life event, such as a marriage, divorce, or the birth of a child, to avoid surprises at tax time.

“I think people underestimate how much money they’ll need in retirement,” Elliott says.

Many people assume that their expenses will decrease in retirement, perhaps to roughly 60 to 70 percent of what they spent during their working years, she said.

But that is not always the case.

“Yes, maybe the kids are out of the house, 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 imagine how they want to spend their life in retirement – ​​travel and hobbies, for example – to estimate how their expenses might change. This helps determine overall savings targets.

Households also don’t often factor into their calculations the potential need for long-term care, which can be costly, she said.