FOOL'S EYE VIEW
10 Great Ways To Lose Money

By Rob Davies
April 29, 2002

Personal financial management for many people is often an exercise in avoiding the pitfalls that are placed in our path rather than actively managing our money to make it grow faster. After all, there are heaps of people doing that already and trying to beat them is not easy. Besides, in the majority of cases, salaries and wages generate the bulk of our wealth. If we can simply preserve as much of that wealth as we can, and use it as efficiently as possible, then we are a long way down the route to financial independence.

So listed below are the ten easiest ways for the unwary to be seduced into doing things that are not in their financial interest. These are the ten easiest ways for us to dissipate our wealth.

1) Buy an Endowment Policy

At the top of list must be that all-time favourite, the endowment policy. Despite all the negative publicity about these products, they are still being sold and still offer poor value for money. The main reason for that is that they are neither fish nor fowl. They offer a bit of life insurance and some savings. But the savings element is badly hit by the high charges incurred in the first few years. As a result, the investment is often worth less than the premiums paid in, even after ten years. Savers are better off investing in low-cost tracker funds and getting protection through term life insurance. And if you want to buy a house, go for a simple no-frills (i.e. low cost) repayment mortgage rather than one with an endowment attached.
> More on mortgages

2) Buy a Personal Pension Plan

Not far behind are Personal Pension Plans (PPPs). They too incur high charges, but you will be lucky to ever find out what they really are. One simple way is to ask the manager for a current valuation and a transfer value: the difference will be somewhere around 10% of the fund, and that is what the manager will keep back for himself. More effective these days are Stakeholder Pensions or SIPPs that can hold low-cost tracker funds.
> More on pensions

3) Buy the Latest Hot Fund

A cracking good way to get through money is to invest in newly launched funds that take advantage of the latest investment fad. This year, bond funds have been all the rage -- so keep an eye out for that one. Prior to this year, recent favourites have included technology, biotech, emerging markets and gold. The problem though is always the same. The funds can only be launched when there is the maximum amount of hype in the market, and that means that all the relevant shares are already in short supply, and hence expensive.

4) Keep Your Overdraft High

The simplest ways of losing money are always the best. Unsecured borrowings from the bank attract interest rates in the teens and even higher. Few investments can match those rates, so getting a double-digit return on your money can easily be achieved by paying off some of that debt.

5) Never Pay Off Credit Card Debt

Similar rules apply to credit cards. Issuers make it even easier to borrow money, by asking you to only pay a minimum amount each month. If anything, interest rates on these products are even higher than on bank accounts.
> More on Credit Cards

6) Buy Everything on Borrowed Money

It goes without saying that a great opportunity to lose money is to buy that car, fridge or TV on the special finance package the dealer is offering. That's why they are so keen to sell it to you. They make far more money by providing the finance than by selling the product. Paying cash for goods that are going to fall in value is the best way to minimise the total cost.
> Get Out Of Debt

7) Never Use ISAs

Despite your best efforts, you still have money left over. Well, a good way of losing more of it is to invest without the benefit of an ISA wrapper. That way you can pay capital gains tax.
> More on ISAs

8) Ask an IFA for advice

If you are not sure how to lose money, ask a commission-based IFA, or Independent Financial Advisor. He will very likely direct you to the product that gives him the maximum amount of commission and you the least amount of your money invested where it should be, in the stock market.
> More on IFAs

9) Don't Invest in the Stock Market

Putting money you don't need for ten years on deposit might seem prudent. But not investing it in the stock market is an excellent way for it to lose its value. Deposit accounts might look safe, and they are for short-term investments. But by avoiding the stock market over the long term you miss out on the essential wealth creation process that is vital to our society, and your financial well-being.
> Learn To Invest

10) Don't Make a Will

Sure, once you are gone you don't really care what happens to your money, but your dependants might. Not making a will, or making a bad one, will ensure that your beneficiaries spend a lot of time arguing with each other, the taxman and the lawyers, and paying them, before they get their hands on what is left of your estate.
> More on Wills

So that's it, the ten easiest ways to dissipate your hard-won wealth. But it is so easy not to do these things that it seems a shame not to make the effort.

A version of this article was first published in May 2001.