Five Ways Not to Throw Your Money Away

By David McEwen

A penny saved is a penny earned, the saying goes. Actually, it is more like 1.33 pennies saved, because savings come after you pay tax on your earnings.

Among the biggest money mistakes people make is getting sucked into buying items they don't need and may not even get any real benefit from.

Cars are a classic waste of money that could have gone into investment. It's been said that a Toyota does 95 percent of what a Rolls-Royce does, but at a fraction of the cost. It's no coincidence that some of the world's top business and money men ... drive around in very ordinary cars.

According to commentator Quentin James, here are the top five ways people waste money:

• Buying insurance they really don't need. Insurance is meant only to cover situations with major financial consequences. If you've already got the money to take care of your loved ones, then you don't need life insurance, James says. In general, don't buy insurance unless it will really protect you financially.

  Also, work out the opportunity cost of having a policy, and then decide whether it is worthwhile. Imagine if you accumulated the premiums you would have to pay to cover your life for the next 10 years. Now double that amount to account for the gains you would enjoy from having the money appreciating in a savings account. The amount of money you are foregoing is staggering.

  You might still take out a policy to cover you for a setback, but you should at least know what the real cost is.

   

• Buying expensive additional warranties. Major appliance retailers make a lot of money by selling extended warranties that can cost up to 50 percent of the value of the product purchased. In general, if the average life of an electronic product is three to five years, you should just hedge your bets and skip the extended warranty.

  Moreover, as defective appliances tend to pack up during the first year, that risk is covered by consumer protection laws anyway.

• • Paying fees you could have avoided. Whenever you make a
    major large purchase, you can be deceived into paying unnecessary fees.
    It's a psychological trick that all the best financial businesses use.

    Banks know that a $900 administration fee seems like a drop in the
    bucket compared with a $300,000 house. Car dealers are the same. Then
    there are real estate agents, although there are few alternatives for
    selling a house.

    Whatever the deal, don't be afraid to question the fees. You
    might be surprised how often the salesperson will compromise in order
    to get the sale.

     

  • Buying after solicitation. Good marketing involves
    making consumers think they need something they never knew they wanted.
    Solicitation often takes place for products and services that have a
    high potential return for the business that is selling them. These
    include financial products like mortgages, credit cards and debt
    consolidation loans. If it's so good, why are they falling over
    themselves to sell it to you?

     

  • Not maximizing the power of money. The key principle for maximizing the power of money is to be diligent about letting it flow into high-interest accounts.

    If you have money in a 5 percent savings account, use the funds to
    retire credit card debt (at 19 percent), or put it into investments
    yielding 8 percent. It is amazing how this adds up to extra dollars
    over time. Avoid spending today, and the wonders of compounding will
    mean you will have more to spend in the future.

  David McEwen is managing director of Investment Research Group.

  Source: The Nelson Mail. Powered by Yellowbrix.