FOOL'S EYE VIEW
The Seven Deadly Spending Sins

By Cliff D'Arcy
September 14, 2004

When I was young, I found that I had a talent for maths.

Indeed, I went on to study maths at university. However, despite having a head for numbers, I made a right pig's ear of my finances throughout college - and for many years afterwards. I kept half an eye on my bank account and credit cards, but frequently found myself grovelling at the feet of my bank's Student Adviser, begging for a larger overdraft limit!

The problem was that my mathematical gift didn't translate into sensible financial behaviour, largely because I had so many financial bad habits. These failings continued – and even worsened – until I turned thirty. At this point, financial enlightenment dawned, I had a "light-bulb moment" and vowed to start managing my money better.

Although I've been Foolish for six years, I was a bad boy for, say, 25 years. Sometimes, I wonder how much better off I'd be today if I started out on the right road from the start. Oh well, no use crying over spilt milk and lost fortunes! Indeed, perhaps others can learn from my bone-headed mistakes.

To that end, here are seven deadly spending sins that I've committed repeatedly over the years:

Spending more than I earn

I did this for a very long time! As a fun-loving lad, I didn't pay much attention to the fact that my outgoings exceeded my income by some considerable margin. What's more, I made little effort to boost my income or cut back on living expenses.

Consequently, thanks to spending several pounds for every quid I had coming in, I was soon heavily in debt. And, of course, interest built on interest, until my finances were shot to pieces.

Lesson learned: Create a weekly or monthly budget, with room for a few treats along the way, and stick to it. It doesn't matter whether you're Warren Buffett or Wayne Slob - over-spending is a recipe for ruin.

Try our Living Below Your Means discussion board.

Staying loyal instead of shopping around

I opened my first current account when I arrived at college. NatWest had a sub-branch on campus and promoted its services heavily during Freshers' Week. Hence, I blindly signed up with it and, as I eventually owed it a small fortune, I found myself stuck with NatWest for the next six years, giving it all my banking business, including a personal loan, two credit cards and insurance policies.

During those six years, a new generation of better bank accounts came along, but I failed to switch. In fact, I only began shopping around for a better account after NatWest had made a series of annoying blunders. In 1992, I switched to one of the new-fangled telephone banks and never looked back. Recently, I switched account again, in order to earn lots more credit interest.

Lesson learned: You get no prizes for loyalty, so shop around for every financial product you buy.

There are numerous great bank accounts in our Banking centre.

Misusing my credit card

In my foolish youth, I committed all the major sins with my credit cards. I was fined for not paying my bills on time; I paid interest at over 20% a year; and, worst of all, I frequently withdrew cash using my credit card, paying ridiculous charges in the process. Aargh!

These days, I've learned how to be sensible with my plastic, which I now call my "debt" card. Although I use it for almost all my spending, I always pay off my bill in full. Hence, using my card costs me nothing, but I enjoy up to two months' interest-free credit.

Lesson learned: Used unwisely, credit cards are Weapons of Money Destruction. Used sensibly, they become a valuable budgeting tool.

Pick your plastic: we have several great offers in our Credit Card centre.

Ignoring tax-free savings accounts

According to the Bank of England, UK households have almost £500 billion squirreled away in savings accounts. That comes to around £20,000 per household but, of course, this wealth is very unevenly distributed!

Nevertheless, one mistake that tens of millions of UK savers make (and I once made, before I wised up) is to put money in a bog-standard savings account, instead of a far superior cash mini-ISA. Don't be put off by the jargon: a cash mini-ISA is simply a savings account into which you can deposit up to £3,000 each tax year.

Cash mini-ISAs beat traditional savings accounts in two ways. Firstly, you don't have to pay tax on the interest you earn, which means more money in your pocket, plus no hassles from the taxman. Secondly, banks promote cash mini-ISAs very heavily, so they usually pay much higher rates of interest than other accounts do.

Be warned: the cash mini-ISA limit will drop to a measly £1,000 from April 2006, unless the government changes its plans. So, if you want to put some money away for a rainy day, do it as soon as you can.

Lesson learned: Doing your research will help you to find better financial products.

This cash mini-ISA pays a great rate of 5.1% AER, tax free.

Not protecting myself properly

Even today, I still think that I haven't insured myself adequately. Although I spend a fair amount of time tracking down Best Buy cover, I don't feel that I have enough protection. The good news is that I have decent home (building and contents), motor and travel insurance, plus private medical insurance.

However, I don't have enough life insurance to ensure that my family won't lose out financially when I die. I have enough to give them a helping hand, but not sufficient to replace my income completely. I'm going buy more life cover after shopping around, both for me and my wife.

Also, I really should investigate buying income protection (long-term sickness cover) and critical illness cover, which was one of my New Year's resolutions. You can learn more about protection in this recent article.

Lesson learned: Everyone should take steps to protect themselves, their families and their assets.

Get a better quote in our Insurance centre.

Gambling instead of investing

Oh boy, this was one of the worst mistakes of my life!

I've always been a risk taker and, at times, I have benefited financially from this behaviour. However, for five years in the Nineties, I developed a serious addiction to Blackjack. Being a mathematician, I tried to use my knowledge of probability to win big at the casino. Surprise, surprise, I was a reckless and ill-disciplined player, so I lost a packet. Groan!

After digging myself out of deep debt, I turned my appetite for risk to the stock market. And, happily, investing in shares has made me richer - in almost every year since I quit the card tables!

Lesson learned: While the stock market can be volatile, gambling is for mugs!

Check out this cheap, simple stock-market investment.

Not planning for retirement

Last year, I wrote an article about my pension CV, in which I pointed out the glaring holes in my contribution record. In fact, only about half of my working life to date is made up of pensionable service, which leaves me with a gap of about nine years.

Like so many young (and older) people, saving for retirement rarely featured on my "to do" list. However, the years have flown by: now I'm 36 and a lot more worried about what will happen to me in twenty-five or thirty years' time. Fortunately, I pulled my finger out and eventually started a Stakeholder pension. I plan to put in as much as I can afford - and hike my contributions as often as I can.

Lesson learned: Start saving for your retirement as soon as you start work - and don't leave too many gaps in your pension CV.

Visit our Pension centre.

If you'd like to reveal your spending sins, please post a message on our Article Feedback board. Go on, confession is good for the soul!

More: Ten Ways To Protect Your Wealth | Three Roads To Riches.