How to shrink your bottom line

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Shrinking your bottom line is as easy as thickening your waist — all it takes is the discipline to develop bad habits and consistently make the same mistakes over and over.  

Some basic methods for subtracting from your net worth, such as simply spending all your money, may work for most people. But advanced techniques will help even the most diligent and financially responsible people fritter away their fortunes.

Personal deficit
Read the first three tips for bottom-line shrinking basics. The last seven tips offer more sophisticated ways to lose money.
10 ways to shrink your bottom line
  1. Spend too much
  2. Don’t save
  3. Use credit as an emergency fund
  4. Try to get rich quick
  5. Buy high, sell low
  6. Raid retirement funds early
  7. Pay lots of fees
  8. Go bare, or — inappropriately covered
  9. Let taxes run rampant
  10. Believe everything you hear, read and see

1. Spend too much

Maintaining a champagne lifestyle on a tap water income will enhance anyone’s attempts to shrink their bottom line.

Spending more money than you bring in is the granddaddy of all financial problems. If more money goes out than comes in, it really doesn’t matter what else you do.

“Living above your means is the number one disaster,” says Cary Carbonaro, Certified Financial Planner and president of Family Financial Research.

So toss the budget and break out the credit cards to see your net worth slip away as quickly as the national debt balloons.

“If you don’t have a budget, you don’t know that you’re overspending or that you’re under-spending or what you have leftover to invest and save. I feel like it’s basic 101, but everybody hates (this advice),” says Carbonaro.

“Not unless you’re really incredibly, incredibly wealthy can you say, ‘I don’t need a budget because I know I have enough money no matter what,'” she says.

Unbridled credit card use can hasten the decline of your fortunes. Even those with a low-interest credit card discover that money spent servicing debt can nickel and dime any savings plan to death.

Tip: Unless you’re expecting a billion-dollar inheritance, start tracking your expenses using this spending work sheet.

2. Don’t save

Even if you’re not spending more than you make, simply not saving anything can have a similarly negative effect on your net worth.

Except for the very rich with their swimming pools overflowing with silver dollars and cabanas fitted with gold-plated commodes, everyone will eventually run into a situation where they need savings, either to stop working or to deal with an emergency.

3. Use credit as an emergency fund

For a long time credit cards have served as the de facto emergency fund for many.

With credit issuers now lowering credit limits and increasing interest rates in response to the Great Credit Crunch of ’08, a stash of real money seems much more appealing these days. An emergency fund that’s not available in an emergency won’t do anyone much good.

Carbonaro recommends her clients keep, at minimum, three months’ to six months’ worth of savings as an emergency fund. For some clients she recommends savings beyond that amount.

“Because if they get laid off in this climate, I want them to have a lot of cash available,” she says. “I used to suggest that people get a line of credit on their house and that would be their backup emergency line.”

“Of course, you know what the problem is with that — they keep freezing those lines right now, so that second emergency fund is almost gone or even nonexistent at this point. Not for everybody and not in every case, but the point is that the option is mostly gone,” says Carbonaro.

4. Try to get rich quick

Those can’t-fail schemes advertised on TV and radio will get someone rich, but it won’t be you. Thus they make the perfect investment vehicle for investors looking to lose their shirts.

“Some people would like to believe that there is a system to beat the system and there is always a segment (of the population) that wants to get rich quick. And the only people that do get rich quick are the people that are peddling this garbage,” says Eric Tyson, financial counselor and author of “Personal Finance for Dummies 5th edition” and “Investing for Dummies.”

“And they charge outrageous fees for what they’re selling,” he says.

5. Buy high, sell low

Buying a stock or mutual fund at the height of popularity and then selling at fire sale prices is a surefire way to get subpar returns — and the antithesis of sound investing principles. But chasing returns and hopping in and out of the market based on emotional whims is a common American pursuit.

Chicago-based Morningstar tracks fund returns, but also studies actual investor returns, based on money flows in and out of funds over time. It appears that investors don’t win the performance-chasing game. For example, Morningstar determined that the average investor in a large-cap domestic growth fund lost 0.3 percent a year in the 10 years through Sept. 30, but those funds returned 2.4 percent a year on average, according to a report in the Wall Street Journal.

“You have to be able to come up with a plan and then stick to it,” says Tyson. “That doesn’t mean that you’re inflexible. But you shouldn’t have knee-jerk reactions to recent news events, and unfortunately some people do.”

Tip: Learn about simple and complex long-term investment strategies

6. Raid retirement funds early

Taking early withdrawals from retirement accounts can accomplish two goals at once: Investors can take a bath on their investments’ future earnings power, plus they get to donate 10 percent of their withdrawal to the U.S. government, courtesy of a hefty penalty imposed by the IRS.

Losing out on the compounding interest is the real shame, says Carbonaro.

“If I could talk to a young person before they take an early withdrawal of $10,000, I could say, ‘You’re giving up $4,000 now (in taxes and penalties).’ But that $10,000 for a 25-year old would be worth $217,245 in 40 years, assuming 8 percent growth per year,” she says.

“It’s a lot to lose for instant gratification now versus planning for the future,” she says.

Tip: Learn more about how to wreck your chances to retire.

7. Pay lots of fees

For those with a surfeit of money, bequeathing it to charity can lighten your load. Or you could give it to a needy mutual fund company in the form of fees on your investments.

Whether you’re investing in actively managed funds or index funds, fees can vary considerably. In general, the expenses on an active fund will be much more than those of an index fund.

Proponents of index funds point out that after fees and expenses, active funds usually equal or trail the returns of funds that follow an index.

“Fees are hugely important and often they get overlooked because people chase after the recent hot investments,” says Tyson. “People should look for sound investments and then look for investment providers who manage fees and keep them to a minimum.”

You can’t control the market, but you can control the fees you pay.

Tip: Read about the folly of discounting fees in Bankrate’s story on 10 ways to annihilate your portfolio.

8. Go bare, or — inappropriately covered

Leaping into the void heedless of risk makes for a much more exciting life, and you also save on all those insurance premiums.

Disability, long-term care and life insurance policies all make expensive promises to cover unforeseen events that can drain your family’s resources if they occur.

Carbonaro ranks not having enough insurance as one of the biggest money mistakes people make, right after overspending.

“It’s risk management,” she says. “I think they just don’t know. And, of course, nobody likes to spend money on insurance,” says Carbonaro.

Like wearing three jackets but no pants, many people get lots of insurance on their car and home, but neglect to investigate disability, long-term care and life insurance.

“People tend to be over-insured in some areas but under-insured in other areas. They may overlook getting long-term disability or, if they have financial dependents, they may not have adequate term life insurance,” says Tyson.

Tip: Read more about the importance of certain types of insurance in Bankrate’s story on 7 common insurance mistakes.

9. Let taxes run rampant

No one enjoys paying taxes, though most people know there are perfectly good reasons for doing so. Taxes create civic improvements and pay for community services like firefighters and a police force.

Without some kind of plan to minimize taxes, you can end up paying too much of your hard-earned money to Uncle Sam.

“Many people just simply fail to learn about the tax strategies that can help them,” says Tyson. “Taxes are something that can be managed and can be reduced, and people do need to keep up with the ever-changing laws. Your failure to do so is going to result in paying much higher taxes than you need to.”

Investing also results in taxation if you buy and sell stocks willy-nilly in taxable accounts. Even if you do nothing, your mutual fund company may serve up a big plate of taxable gains, particularly if they engage in a lot of trading. It’s even possible to owe taxes when your fund is shrinking in value. Investors with a plan to manage taxes can save themselves a ton of money.

Tip: Use every deduction you can think of to reduce your taxes, as long as it’s legitimate, of course. Uncle Sam even provides tax breaks to help you get ahead in life.

10. Believe everything you hear, read and see

Do you get flyers in the mail that promise you can beat the market — any market, any time? Do they say that the methods have been proven to make money 90 percent of the time? Does the strategy for busy, conservative investors promise to generate returns of 88 percent a year?

These promises belong in the “too-good-to-be-true” file, otherwise known as the recycling bin.

If you’re not sure about how to deal with your finances, you need to develop the ability to distinguish truth from fiction. And if you want to hire someone to help you, you’ll need to distinguish the skilled, honest advisers from the shysters. Knowing who to listen to and who to ignore is an important skill.

“The average person has a hard time discerning the good from the bad, and that’s why you should do some homework,” says Tyson.

Says Carbonaro, “My job (as a financial planner) is to help my clients make smart decisions in all these different areas — cash management, insurance, which is risk management, tax planning, retirement planning, investment planning and estate planning.

“If you make mistakes in any of those areas, you will negatively impact your net worth,” she adds.

For instance, at tax time you might want to consult with an experienced CPA with good references.

“The average person is not going to contact the IRS and order publications and read through them,” says Tyson. “They’re horribly written and don’t highlight the information that people can benefit from.”

Or you can find hundreds and hundreds of books and articles written by knowledgeable people eager to tell you what you should be doing. But from news sources, to books, to well-meaning relatives, discriminating between good and bad advice can save you from making bad investments in oil wells and bullion or stock tips from your cousin George.

The alternative, learning the hard way — through experience — can be an expensive lesson.

Tip: Read Bankrate’s story on Finding a financial planner to help you separate the wheat from the chaff.