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Common financial mistakes and how to avoid them

SINGAPORE — Saving too little? Buying the wrong things? It’s easy to make financial mistakes like these, and plenty more. While anyone can make mistakes, focusing on how to avoid the ones with the biggest impacts can put you in a better financial position.

SINGAPORE — Saving too little? Buying the wrong things? It’s easy to make financial mistakes like these, and plenty more. While anyone can make mistakes, focusing on how to avoid the ones with the biggest impacts can put you in a better financial position.

Not saving enough

One of the most common mistakes consumers make is simply not saving. It’s easy to see why, since everything from daily expenses to the lure of a sale or an overseas vaca-tion can easily take up any extra cash.

Saving from an early age and putting money aside every month can lead towards a bet-ter future. The solution, then, is to start saving every month, even if it’s a small amount

Making the wrong investments

Once those savings start to accumulate, the next step is to invest the money wisely. A variety of research shows the pitfalls investors face.

A study by the Executive Office of the President of the United States, for instance, showed that investment returns for savers receiving “conflicted advice” are reduced by about 1 percentage point each year. Conflicted advice comes from financial advisors who, like many here, are compensated based on what they recommend and then tend to recommend options that are better for their own pocketbook than for the investor.

Dartmouth College Professor Kenneth French also found that investors could make an extra 0.67 per cent per year if they switch to a passive market portfolio rather than buying unit trusts or other managed funds.

Obtaining independent investment advice and selecting passive investments such as ex-change trade funds (ETFs) rather than unit trusts could make investors wealthier.

Not taking government and employer giveaways

There’s also free money available, and it’s a mistake not to take it.

The government, for instance, gives money away for everything from child develop-ment accounts and childcare subsidies to Pioneer Generation medical benefits and SkillsFuture training grants, and more. Some employers offer benefits such as subsi-dised housing or car loans, or matching contributions for retirement savings accounts.

While some people don’t search for these benefits out or are reluctant to take them, it’s worthwhile to find and take them rather than leaving money on the table.

Taking on too much debt

Another common mistake is borrowing too much. While taking out a loan to buy a home or for education can be beneficial, the recent Manulife Investor Sentiment Index showed that one-third of Singapore investors hold debt other than mortgages. As RealDealRetirement editor Walter Updegrave observed, “it’s the debt we take on to maintain a lifestyle that exceeds our earning power that gets us in trouble.”

With interest rates on loans such as credit cards often reaching 28 per cent, borrowing can be costly. Even worse is paying late, since late payment penalties often exceed S$50 and a credit history showing late payments makes it harder to get a loan when you actually need one.

The best solution is to minimise debt other than a housing loan and, if you do borrow, to pay the bills on time.

Not buying the best property

Consumers make mistakes in real estate, too

For homebuyers, property advisory firm Realila advises that two of the biggest mistakes are not getting a loan approval-in-principle (AIP) and listening only to the seller’s agent. Getting an AIP helps you know what you can afford and protects your deposit. The seller’s agent is there “to tell you what they want you to know about the property with one goal – to sell it.” Homebuyers should research properties themselves or obtain independent advice.

Investors may put too much money into real estate. SMU Assistant Professor Choi Hyun-Soo found that households in the US put their faith in local real estate rather than investing in companies located further away. The implication for places like Singa-pore that “have had huge real estate booms as well as relatively less well-functioning stock markets,” he observed, is that investors might have too many eggs in one (real estate) basket. Diversifying into a balanced portfolio is important.

Paying too much for insurance

While life insurance is a separate topic unto itself, consumers can save money by updat-ing their other insurance policies whenever major life events happen. Advisory firm Go-Bear observed that drivers who get married or individuals who shift to better work conditions may be considered lower risk, for example, which entitles them to lower in-surance premiums.

Paying too much while shopping

One area where Singaporeans do excel is shopping. The TNS Connected Life study found that Singaporeans are savvy shoppers, with nearly 88 per cent conducting re-search before making a purchase compared to 84 per cent worldwide.

Research alone, though, may not be enough. The Economic and Social Research Insti-tute (ESRI) in Ireland found that consumers tend to think that deals closer to the top of a product range were good value even when the high-end products were expensive for what they were and low-end products were good value.

“Independent price comparison sites can play an important role,” ESRI commented, “by helping consumers to integrate the information or by drawing consumers’ attention to the most important product features.”

Be a Savvy Money Manager

While consumers can easily make mistakes, simple steps to manage money better can make a real difference. By making a few small changes, consumers can avoid a multitude of costly mistakes.

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