050707: Personal Finance: Money mistakes to avoid

In a time when money is hard to come by, you should be a lot smarter in managing your finances. Previously, I’ve written about expense busters that can save you thousands of pesos every month. These included avoiding all forms of gambling, excessive drinking, smoking, drug abuse, designer labels, expensive hobbies and extra-marital affairs. The savings you get from shunning these things can build up to millions over the long term. Below are additional common money mistakes that many people commit and cost them loads of money. . . sometimes, without them realizing it. 1. Having a deck of credit cards: If you are one of those whose wallets are overstuffed with credit cards of every color you are setting yourself up for a lifetime of debt. The aggressive marketing of card issuers and the relative ease by which you can get credit cards have reinforced our society’s culture of spending, which has resulted in an ever-growing number of people stuck in a debt hole. A credit card is not a source of money but a tool (a very convenient and efficient tool) to let you spend money you still haven’t earned. Credit cards tend to give you the power to purchase anything, anytime and once you start to use it recklessly, you can get into financial trouble pretty fast. Get rid of those credit cards; you only need one for emergency use. As much as possible pay in cash; this will help you cut down your spending 25 percent to 30 percent. If you have to buy on credit then try to pay your bill in full the next month to avoid paying high interest charges… and you still get to earn those reward points. (The missus got a home entertainment system through earned points even though the card company has gained little from interest charges because she often pays the balance in full.) Credit card balance is one of the most expensive kind of debt (next only to your local “5-6” loan shark), so keeping it to a minimum will save you a lot of money. 2. Impulse buying. Both men and women fall prey to buying on impulse and often it involves items that you really don’t need but only serves to provide a short-lived feeling of satisfaction to address an instant craving. Unrestrained impulse buying can put your finances in a bind because money for essential needs is diverted to something else and you could be forced to borrow. Always have a spending plan or a list when you buy things and resist the temptation of purchasing an item that’s not on your list. Avoid places where you easily get tempted to spend even if you don’t have any plans to do so. These could be shoe stores, sporting goods shops, Japanese restaurants, etc. In my case, it’s bookstores. And don’t let yourself get into double trouble by buying on impulse with your credit card. That’s a big no-no! 3. Investment scams. I have relatives and close acquaintances who have lost their lifetime savings running into millions (and irreparably damaged relationships) to investment scams. People are victimized by scams because of their burning desire to earn big quickly and without much effort, which is exactly how most investment scams are trumpeted. Who wouldn’t want to earn 4 percent to 5 percent monthly doing virtually nothing? When a friend or relative tells you about an exciting, powerful and sure-fire money-making investment or business, don’t take their word for it. Do your homework and try to gather as much information as you can about the scheme. Ask questions, a lot of questions. Ask professionals like registered financial planners who know about investment risks and what are realistic rates of return. Just because you trust your cousin or your in-laws doesn’t mean you also have to trust their favorable “analysis” and recommendation of an investment scheme (unless of course they are experts in this field). Saying no to their offer doesn’t mean you love them less. It would also help if you educate yourself about personal finance so that you can easily spot a scam when it presents itself. 4. Low interest accounts. Interests on regular savings accounts have dropped to jokingly low levels. To me, P10,000 earning a pitiful P80 in one year, coupled with being charged P200 monthly for falling below the minimum maintaining balance is a big mean joke. And if you consider the expenses for your regular trips to the bank, it’s obviously a losing proposition. So, why even bother to open savings accounts when you’re probably better off keeping it at home, saving yourself some precious time and money by not going to the bank? I will never understand people who keep most, if not all of their money in regular savings accounts. The amount you ought to keep in these very-low interest earning accounts is the minimum balance required to keep you from paying charges plus enough money to cover your expenses in one month. All the rest should be placed in accounts or investment vehicles that pay or have the potential to earn more than the prevailing inflation rate. For instance, if the average inflation rate stands at 4 percent, you can put your money in a time-deposit account that earns 5 percent or more. If you can handle some risks, you can place your money in well-managed mutual funds or UITFs, which have the potential to earn double-digit returns. For the more intrepid investor the stock market can be your playground. 5. Buying too many things that decline in value. This has most likely something to do with trying to keep up with the “neighbors.” By neighbors, I mean not just the next-door neighbors but also those distant individuals (perhaps relatives or celebrities) that the big spender is trying to emulate. The couple Ron and Clarissa (not their real names) has only one child but their garage is packed full with eight vehicles including a sports car and a souped-up Hummer. What’s the big idea? It’s a good thing they can afford it. But there are many who can’t afford it (or doesn’t need to) yet you find them accumulating a lot of stuff that only degrades and loses value over time. Do you really have to own more than a hundred pair of shoes or dress differently every day at the expense of having zero savings? Do you really have to have a TV in every room in the house just like your best friend? Who made the rule that you have to buy the latest cell phone even if your previous one is only six months old and working perfectly fine? Do you really have to own three cars even if your wife can’t drive? Try to calculate the amount you are spending to maintain these unnecessary luxuries and you will probably have second thoughts of getting another one. Before you buy something that is nonessential consider the effect it will have on your finances and how it will take you even farther away from accomplishing your financial goals. Try to look for a less expensive way of accumulating pogi points. Come to think of it, a big, fat bank account or investment portfolio will score you a lot of pogi points. Your choice!   Alvin T. Tabañag is a registered financial planner and a member of the RFP Institute and the Financial Planning Association (USA). He is the founder and training director of Advantage Plus Consultancy & Training, which is dedicated to promoting a culture of savings among Filipinos through financial education. Comments & questions about the article and other queries maybe emailed to alvintabz@yahoo.com. Join the Seventh RFP Program (July 7-August 25, 2007). Visit www.rfp-philippines.com, or inquire at info@rfp-philippines.com /Tel. No. 6342204.

 

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