Here are some big money blind spots you need to avoid, advisors say

Managing your personal finances can seem like an endless mix of checklists and rules of thumb.

While all kinds of financial considerations compete for attention – budgeting, saving, paying off debt, buying insurance, buying wisely – consumers may inadvertently overlook some important nuggets.

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, said Kamila Elliott, CFP, co-founder and CEO of Atlanta-based Collective Wealth Partners.

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

Their number generally varies from 300 to 850.

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

Lenders are generally more willing to provide loans and better interest rates to borrowers with credit scores between 700 and above, according to the Consumer Financial Protection Bureau.

Let’s say a consumer wants a fixed mortgage of $300,000 over a 30-year term.

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

The latter’s monthly payment would cost $324 more than the person with a better credit score, or $116,000 more over the life of the loan, according to FICO’s loan calculator.

Wills are basic estate planning documents.

They specify who will receive your money after your death. Wills can also stipulate who will care for your children and monitor your money until your children turn 18.

Planning such a bleak 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 wealthy families with children who don’t have a will,” Glassman said.

Without such a legal document, state courts will choose for you — and the outcome might not match your wishes, he said.

Going further, individuals can create trusts, which can assign more control over details such as the age at which children have access to inherited funds, Glassman said.

Choosing how much money to set aside 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 necessities – like paying the mortgage, rent, utilities and groceries – in the event of an unexpected event like a job loss.

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

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

Meanwhile, a couple in which spouses earn similar income but work in different fields and professions will only need three months of expenses. If something unexpected happens to one spouse’s job, there’s a good chance the couple can temporarily rely on the other spouse’s income, 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.

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

“Ten out of ten people can’t explain how the withholding system works,” said Ted Jenkin, CFP, CEO and founder of Atlanta-based oXYGen Financial.

Employers base these deductions in part on information workers provide on a Form W-4.

Typically, taxpayers who get a refund during tax season withhold too much money from their paychecks throughout the year. They receive these overpayments from the government via reimbursement.

However, those who owe money to Uncle Sam have not withheld enough money to pay their annual taxes and must make up the difference.

People who owe money often blame their accountants or tax software rather than themselves, even though they can usually control the amount withheld, Jenkin said.

Someone who owes more than $500 to $1,000 may want to change their withholding, Jenkin said. This also goes for someone who gets a large refund; instead, they may want to save (and earn interest on) that extra money throughout the year, Jenkin said.

Workers can fill out a new Form W-4 to change their withholding.

They may want to do this during any major life event, such as 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 said.

Many people think their expenses will decline in retirement, perhaps to about 60 to 70 percent of their expenses during their working years, she said.

But it’s not always the case.

“Yeah, maybe the kids aren’t home, but now that you’re retired you have more time, which means you have more time to do things,” Elliott said.

She asks her clients to imagine how they want to spend their retired lives – travel and leisure, for example – to estimate how their spending might change. This helps guide overall savings goals.

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