Saturday September 22, 2012
Silly financial mistakes to avoid
By EUGENE MAHALINGAM
MANAGING your personal finances wisely is not always an easy task. It requires good research, thorough planning, a bit of luck and some common sense.
Unfortunately, the element of common sense does get taken for granted and many of us end up making simple or silly financial mistakes which can be avoided. Here are some:
Hoping to get rich quickly, many people end up putting their money into something they don't completely understand.
“Many people get fooled into schemes that claim to offer huge returns with minimal risks,” says AmBank wealth head Joshua Lim.
“However, they should realise that the risks must correlate with the returns they are expecting,” he tells StarBizWeek.
Lim says many people today fall into the trap of “get-rich-quick” schemes.
“People should realise that a well-researched investment can generate between 8% and 9% returns a year. If someone were to come up to you and say that he can give back 2.5% a month, which translates to about 30% annually, something is definitely wrong.”
He adds that many people often end up plonking high amounts of money into such schemes.
“Some of these schemes demand sums of up to RM20,000 and RM30,000 per individual. Instead of asking the public, why not get it from large organisations such as listed companies? If you're offering 30% in returns a year, many large companies, which don't even earn that much annually, would jump at the opportunity! These are just the silly schemes that many people fall for.”
Loans to repay existing ones
Instead of getting a loan to finance something you need, many people tend to end up borrowing money from banks to pay off existing loans.
“There are many people that keep borrowing money to repay their loans. Some people make the mistake of using high-cost funding to repay low-cost ones,” says Lim.
As an example, he says many individuals use their credit cards to settle existing credit card debt, not realising that the interest can be quite high.
Standard Financial Planner Sdn Bhd's Jeremy Tan concurs, pointing out that people should always try to settle credit card debt as soon as possible.
“Credit cards are easy to use because you just swipe it and it's settled. But huge balances get accumulated and because of the high interest rate, repayment becomes a problem.
“I know someone who has a credit card debt of RM50,000. With the minimum 5% repayment rule, he has to pay at least RM2,500 every month. That's excluding the monthly interest that you accumulate as you delay repaying your debt!”
Buying what you don't need
Lim notes that many individuals waste their money on goods and items that they want, but don't necessarily need.
“Many of us put our wants before our needs. In the United States and Europe, people are spending more than they can afford.”
He says many people also want to “keep up with the Joneses”.
“A lot of us are influenced by what people around us do. If our neighbour buys some large ticket item, for instance, we also want to do the same.”
Tan says many Gen-Y individuals like to spend their money on new items “to keep up with the latest trends.”
“Instead of saving, many people these days use up their disposable income buying the latest gadgets because it's the in-thing to do.”
Failing to invest
On the other extreme, some people just love to hold onto their money or as the saying goes, “stash their cash under the mattress.”
“Many people make the mistake of just leaving their money in the bank worse still if it's a savings account where the annual interest is below 3%,” says Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui.
“Annual inflation in certain urban areas can be around 5% annually. So, instead of hording their money, they should find ways to invest in plans that can help them overcome this inflation.”
He advises individuals to do thorough research before investing in anything.
Saving for a rainy day
Of course, we're not saying you should invest every sen you have. Having cash that is immediately or easily available is important too, especially during emergencies.
“It's important to have money available to you should you need to pay for something upfront or if you get retrenched and need to survive on some cash,” says K. Maran, who was retrenched for four months.
Foo says people who invest their cash should have the discipline to “not touch money” and let it grow.
“Those that put their money in some kind of investment plan should leave it there for at least five years and not withdraw the cash during that time.
“Otherwise, you shouldn't invest. The market could go bad and you might need to withdraw it,” he says.