An article on stuff.co.nz today by Nicole Pedersen-McKinnon states the top 10 money mistakes are:
1. Letting time-poor mean a poor time
You will be able to save on every bill and every premium – unless you signed up for the product yesterday. Companies rely on us to be too busy to chase the best deal … but they’ll happily offer a new customer far better terms. Even if you just get a better rate on your mortgage, you’ll secure in a couple of days what it would take the average person a year to earn. Move a $300,000 loan from the average to the best deal to keep $56,000 in interest.
2. Using credit to spend more than you earn
This short-sighted behaviour probably has the greatest potential to sabotage your future. To be a financial success, you don’t need to be particularly clued up, but you can’t be clueless, either.
3. Having no emergency fund
You should have an emergency stash of three months’ salary, or – safer still – six months. This will give you a buffer if there’s an unexpected cost impost, or half a year’s grace before you get worried about a fall in income.
4. Not teaming up
There’s no point doing your utmost to make savings if your spouse or partner increases their consumption to absorb the extra cash. The pursuit of prosperity needs to be a partnership.
5. Falling for ‘generous’ banking offers
The banks set traps left, right and centre to try to get you paying more. A “thoughtful offer” to reduce your repayments if you are ahead on your mortgage is designed to recoup the lender’s lost interest. An enticing introductory or honeymoon rate will come with a sky-high revert rate. Ever-so-reasonable minimum monthly repayments on your credit card may well keep you in debt and paying interest forever.
6. Making matters worse with debt consolidation
Consolidating your debts – rolling all your debts into your lower-interest mortgage – has become almost a mantra when it comes to debt reduction. But let’s say you have personal debt of $9000 at a rate of 12 per cent. If you stayed the course, you would end up paying $1777 in interest. Extend your home loan, though, and you would ultimately pay an enormous $11,840 in interest. Instead of paying off the loan more quickly at a higher rate, you will pay it off at a lower rate over 25 years. You need to maintain your payments at the level required by a personal loan for debt consolidation to work for, not against, you.
7. Indulging in ‘retail therapy’
Like eating, there are often psychological reasons behind excessive shopping. If you can recognise any personal factors that drive you to flash the plastic, you are far more likely to be able to stop doing it. Far better to address the issue that necessitates the therapy than opt for the expensive and temporary Band-Aid that is shopping.
8. Failing to think defensively
Smart money management is not simply about building wealth but protecting what you’ve already amassed. What would become of your family if – perish the thought – you died? Life insurance is vital to cover debts, living expenses and more. Also, bear in mind that your ability to earn money is actually your most valuable asset, so income-protection insurance is a must, too.
9. Buying a car with credit
This is among the worst uses of “very bloody bad debt” – my term for non-mortgage, non-tax-effective debt. A car is a depreciating asset – if you buy a $20,000 vehicle with a three-year personal loan at 12 per cent interest and the car loses 12 per cent in value in each of those years, you will have forked out $23,914 by the time you have paid it off but the car will be worth only $14,069. And the total cost/residual value situation is even worse if you use very bloody bad debt to fund a holiday – all you’ll have to show for your debt is photos.
10. Believing the hot tip
We all want to believe there is a short cut to building wealth. And if you get in just before a boom, you certainly can make a lot of money quickly (assuming, that is, that you sell before any bust). But ordinarily, wealth accumulation is a slow, steady process. The easiest way to recognise either a dodgy financial product or a higher-risk financial scheme is a headline rate of return above what you can get from an online savings account. If it seems too good to be true, it is probably a scam.
I’d like to add one mistake, which I made myself, that helped me get into as much debt as I did.
11. Turning a blind eye
If you can’t see the bills, they’re not there. If you don’t answer the phone when the bill places ring, they’ll forget about your overdue payments. If you’re not home when the debt collector comes knocking, he won’t come back. This was the mindset I had, the things I kept telling myself when I was in way over my head and felt like I had no options. The reality is, avoiding the bill places, pretending you have less debt than you actually do, is the worst thing you can do. Once I laid it all out on the table, added up exactly what I owed and to who and started making those difficult phone calls to admit my finances were so bad that I was up sh** creek without a paddle OR a canoe, things started to get easier.
This wasn’t because the debts were wiped or I was gifted money, it was because once the bill places were made aware of my situation, extensions or payment options were put in place until I got out of the red, when I could afford to pay more on my debts. The bill places took the pressure off, they called less, there were no more letters in the mailbox with that intimidating fluorescent “overdue” sticker on them. Instead there were letters detailing the arrangements we had put in place along with a gentle reminder of the conditions of that arrangement.
The biggest thing I will stress to those who find themseles with a mountain of debt and no way to get the other side, is to be honest. Be honest with the bill places, be honest with those close to you but most importantly be honest with yourself. The debt won’t go away by itself, you need to make a conscious decision to address the situation then take the necessary steps to get out of it.