FOOL'S EYE VIEW
Five Major Money Mistakes

By Cliff D'Arcy
February 4, 2004

One of my least favourite words is 'expert'. I hate being called a 'financial expert' in radio or TV interviews. In fact, I insist that I'm referred to as a 'personal finance writer' and nothing else! When the great Danish atomic physicist Niels Bohr (1885-1962) said:

"An expert is a man who has made all the mistakes which can be made in a very narrow field."

- he could have been talking about me! Here's another choice quote about making mistakes from Scottish social reformer Samuel Smiles (1812-1904):

"We learn wisdom from failure much more than from success. We often discover what will do by finding out what will not do; and probably he who never made a mistake never made a discovery."

Here are five mistakes that many of us make when it comes to money. However, don't beat yourself up if you've fallen into these traps - just learn from your experiences!

1. Being loyal

Until the Eighties, most consumers tended to stick with the financial suppliers that they (and their relatives) always used. If your parents had a mortgage with the Halifax, you'd probably borrow from the Halifax too. People tended to stick with the companies and brands that they trusted, because they expected to get a decent service.

However, those days are long gone. Partly thanks to market deregulation introduced by successive Thatcher governments, financial services has become a much more competitive arena. For example, these days:

• You can choose between around 8,000 mortgages
• You have a choice of about 1,300 credit cards
• You can find over a thousand savings accounts for your spare cash.

Companies are cutting each other's throats to win our business, which is why it makes sense to shop around. If you practice 'financial monogamy', you'll find that you're missing out on the best deals.

On the other hand, you may be one of those lucky people who enjoy both great deals and superior service. If you are - and they are few and far between - I salute you!

2. Borrowing on credit cards

For many of us, the lure of using 'magic money' becomes too great, and we end up borrowing on our credit cards. This is a major boob, because credit cards charge staggeringly high interest rates. The Bank of England base rate has now been raised to 4%, yet many major credit cards charge standard interest rates of 15% to 20% - four to five times the base rate. Store cards are even worse!

Borrowing at standard interest rates makes no sense when there at least fifty different cards offering 0% interest for up to nine months on balance transfers. Other cards allow you to transfer balances and pay a low rate until the transferred debt is repaid (but it's not wise to keep spending on cards with transferred debts). Finally, many cards also offer 0% on purchases for an introductory period, which gives you a valuable breathing space.

So, you can see that there's no reason at all to pay high rates of interest on your plastic - unless your credit record is shot to pieces.

3. Not checking interest rates

One of the very worst things you can do to your finances is to put money away and forget about it. If you open a savings account and take your eye off the interest rate it pays, you often end up being stitched up good and proper. Here's one shocking example of 'dormant account syndrome'.

The same goes for your borrowing: you'll pay far more interest if you don't put your mortgage to the test. When a special-rate deal comes to an end, don't allow your home loan to move onto your lender's standard variable rate, because it'll cost you dearly. Instead, find a new reduced rate - either with your existing lender or elsewhere.

4. Spending more than you earn

This is a big mistake, but it's one that millions of us make. Last year, the Financial Services Authority estimated that one pound in every ten we spend is borrowed money.

So, taking a typical example: your disposable income is £180 a week, but you're spending £200. Therefore, your debt is growing by £1,040 a year - and that's before interest, probably in the region of 15% a year.

It doesn't matter how high your income is if you consistently spend more than you earn. Who is financially more stable, the City slicker earning £75,000 a year and spending £85,000, or the factory worker earning £10,000 and spending £9,000? Charles Dickens' Mr Micawber had it right: over-spending is a recipe for misery. Learn about budgeting here.

5. Not investing

For argument's sake, let's assume that you have 'all your financial ducks in a row':

1. You've learned to budget and spend sensibly
2. You have no debts, other than your mortgage
3. You have savings for those rainy days
4. You shop around for everyday financial products, including insurance.

This describes my parents and many of their post-war generation. The biggest financial mistake that most of these people make is to get comfortable, sit back and stop at stage four. This means that they miss out on stage five, which is the most fun of all: use the stock market to make you richer over the long term.

Cash won't make you rich over the long term, as this article shows. Property is very popular at the moment, thanks to the boom of the last seven years or so. However, the annual return from domestic property has only averaged 8.5% since 1945. Compare this to the stock market, which has grown by an average of almost 12.5% a year since the Second World War. To me, there's no contest!

More: Visit our Mortgage | Savings | Credit Card | Insurance | Investing centres.

The author owns shares in HBOS, parent company of the Halifax.