There are many positive actions you can take to improve your financial position – such as furthering your education, investing, using insurance to protect yourself from shocks, and planning for retirement. In this column, I focus instead on actions that, in my view, are likely to set you back financially and you should avoid. They range from the mundane to the philosophical.
1. Don’t spend more than you earn.
We all commit this mortal sin occasionally. But if it’s every month, then you’re either surviving on debt, which will only increase (at a compounded rate) over time or depleting your savings. You may know part of Charles Dickens’s famous passage on this matter, but here it is in all its glory:
“My other piece of advice, Copperfield,” said Mr Micawber, “you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and, in short, you are forever floored. As I am!”
2. Never use credit to buy consumables.
If you are using your credit card to buy groceries and not paying the full balance on your credit card each month, it means you are paying as much as 21.5% interest on what you have spent on milk, bread, and tea (among other items). That makes no financial sense and you will probably end up in a debt spiral. Clothing accounts are equally nonsensical. Credit should be used very sparingly and only for large items you cannot afford to buy in cash.
3. Don’t lend to (or borrow from) a friend.
Countless friendships have been ruined and money lost over the centuries because the borrowers have overestimated the patience and goodwill of their friends in wanting their loans repaid. A good friend may be generous and forgiving of your faults … until it comes to hard cash. If money can break up close-knit families fighting over a will, it can destroy friendships with consummate ease.
4. Never undertake a large transaction without verification.
You need to be hyper-alert when transacting large amounts. Never rely purely on electronic means to do the transaction – a scammer may have gained access to your computer and be intercepting your communications. All it takes is for the bank account number of the receiving party to have been altered. Always verify the account number of the receiving party with a phone call or, even better, face-to-face. And don’t expect much sympathy from your bank if the money lands at a different destination.
5. Never sign a contract without understanding the conditions.
People get caught out by this all the time, myself included, who recently discovered that my insurer could increase my life policy premiums above what I believed I had contracted to pay. I have since learned about a “premium guarantee period”, to which I shall devote a future column. The lesson is that not only should you read the small print, you need to understand it, including the unique terms and concepts devised by actuarial whizzkids that elicit a blank stare from anyone who doesn’t inhabit the higher circles of Moneyland.
6. Don’t confuse investing with speculating.
I am continually surprised at people who don’t appear to know the difference between these two concepts. Speculating is a short-term game using money you can afford to lose, such as having a flutter on the horses or dabbling in online share trading. Investing is a long-term endeavour whereby you buy and hold assets (which may include shares and property) you believe will deliver compounded capital growth over time or will provide a regular income.
7. Never invest in something you don’t understand.
On the subject of investing, never put your hard-earned cash into something you fail to grasp. You should know how the return on your money is generated, and it should be relatively straightforward. If it involves a complex web of companies, with no easy way to follow the money, like Steinhoff turned out to be, or it involves unfathomable financial manipulation or engineering, walk away. KISS (Keep it simple, stupid!) applies in particular to your investments.
8. Don’t put all your eggs in one basket.
This simple principle has been with us since the dawn of time, yet again and again there emerge stories of pensioners who commit their entire life’s savings to a single investment, which then fails or turns out to be a scam. Diversify your investments to avoid what financial experts call “concentration risk”.
9. Never take investment advice from amateurs.
Referring to point 6, by all means, follow up on a horse-racing or hot-stock tip from a buddy at a braai using money “you can play with”. But when it comes to long-term investment advice, it pays to speak to a professional, such as a financial planner. It’s the same with your health: you might ask a friend (or consult the internet) for advice on a minor ailment but will consult a qualified GP or specialist if your problem is more serious. And if you’re wise, you’ll go for regular check-ups on both your physical and financial health.
10. Don’t compare your fortunes with those of others.
The guy on the road in front of you is driving a R5-million Ferrari. Envious? Would you like to be him? Apart from the car, you don’t know anything about him. His company may be in liquidation, his wife may have deserted him and his eye-catching means of transport may be about to be impounded by SARS. I end with another quote, anonymous:
“Do not compare yourself with others; just compare your today with yesterday. If there is an improvement, that is an achievement.”
* Hess is the former editor of Personal Finance.
PERSONAL FINANCE
