Are you setting yourself up for financial failure by following commonly accepted money tips?
Money experts Jacqui Pile and Niki Chesworth look at commonly accepted financial advice that can result in costly mistakes.
Look after the cents and the Rands will look after themselves
How many times have you heard this one? Trouble is, you end up driving kilometres to use a discount voucher, or spend so much time in a queue the night before a petrol-price hike, just to save a little money.
Focus on the big decisions that really save you cash. Time is money, so spend it sorting out debts, getting a good deal on your home loan, insurance and cellphone, and finding the best investments to make your spare cash to work for you.
Don’t look a gift horse in the mouth – if it’s free, it’s worth having
The best things in life, in fact, are not always free, even though that enticing word may be used to sell them. Take deals that offer six months’ interest-free credit. They’re designed to get us to spend money we haven’t got, with the expectation that many of us won’t stick to the strict terms of the deal.
If the credit deal is spread over a long time, it can even last longer than the actual product, in which case you will have to borrow again to buy a replacement – leaving you with two credit agreements instead of one.
Many stores offer incentives, like free cash-vouchers, to get you to sign up for a store card, but, remember, they tend to have the highest rates of interest of any plastic. If you have the cash, it’s far better to use it to negotiate a discount.
Don’t waste your money on travel insurance – you’re covered through your credit card, anyway
A common misconception. Credit-card travel insurance may not cover you if you’re injured taking part in adventurous sports on your travels, lose your luggage, or have travel delays. Read the fine print.
Investments should be held for five years to iron out rises and falls in stock markets
This is the wealth warning given to every investor. But it can be a bad piece of advice.
Yes, you should only invest in growth assets, like shares and property, if you know you won’t need the money for at least the next three years – otherwise, you may be forced to sell at the worst time and incur a loss.
But you should also have a target or benchmark against which you evaluate your investments and review your portfolio every year.
If an investment isn’t performing as expected, consider whether it’s the right investment or if the investment manager is right for you. Time alone won’t remedy either of these, and you may need to consider switching.
To buy cheap, buy in bulk
Buying too much food is a trap that many of us commonly fall into, with two-for-the-price-of-one offers or bulk savings. The average South African household wastes about R1 800 a year in perfectly good food that’s thrown away. The best advice is: “Buy what you need” and avoid wastage.
Pay off expensive debt first to save interest
This may make financial sense, but it doesn’t always work in practice. Even if you consolidate all of your debts into one, you can still be worse off in the long run if you never get round to clearing it. Especially if it’s over a longer term.
To motivate yourself to be debt-free, write down everything that you owe. Pay the minimum repayments on all cards and loans (or you’ll fall into arrears or pay a penalty) and set aside a bit extra to clear small debts first, like the R1 000 on a store card.
It’s more rewarding to clear an entire balance than to reduce one big one. If you can’t clear the balance owed, at least cover the interest portion each month and, when you’re ready, set up a direct debit until the balance is cleared.
It’s not worth saving if you have debts – pay them off first
If you use all your income to pay off loans, what will you have to fall back on in an emergency other than possibly more debt? You need access to rainy-day savings – the rule of thumb is at least three months’ outgoings (living costs and bills) in an easy-access account.
With this safety net in place, use any extra cash to pay off debts, as interest rates can be from 10% to 30% and the cost will be far higher than the returns you earn if you put the money in a savings account.
Don’t put all your eggs in one basket
Diversification is a classic investment technique, but taken to its extreme, it can become ‘diworsification’. This happens when you have a multitude of investment products, life-cover policies and retirement annuities spread across different advisors, institutions and investments – all attracting fees along the way.
Buying life cover from two different companies or via two different advisors won’t reduce your risk of death or disability, it simply means you won’t benefit from any discount you may get by purchasing more from one provider.
Review your portfolio and consolidate if necessary, so, instead of splitting R15 000 between three different banks, invest the full amount with one reputable institution for better interest rates.