Sunday, January 11, 2009

Money Mistakes To Avoid

I find this article about money mistakes to avoid very informative so I'm posting it here. Hope you guys will learn from it as well as I found a gem in this.

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Money Mistakes To Avoid
by Alvin T. TabaƱag RFP(R)

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. A credit card is not a source of money but 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% to 30%. If you have to buy on credit then try to pay your bill in full the next month to avoid paying high interest charges. 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. 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. 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. 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 4-5% 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. 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 account. 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%, you can put your money in a time-deposit account that earns 5% 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." 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 6 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 non-essential 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!

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