Last week’s column, Great Hockey Games Involving Canadians came about when I was reminded of a list of such games that I was asked to compile for the 1978 book The Canadian Book of Lists. In that column I mentioned that I had another list in the book, which was The Ten Most Common Personal Financial Planning Mistakes, and that I would also revisit that list to determine what changes I feel took place over the last thirty-five years. Let’s begin with the 1978 list.
1. Buying too much on credit.
2. Borrowing at the wrong places: for example, borrowing from a finance company when the loan would be cheaper at a bank.
3. Not paying off debt as quickly as possible, particularly credit cards and charge accounts, where the interest expense is exhorbitant.
4. Owning a car when you can't really afford one, or buying one more expensive than you can afford.
5. Renting instead of buying living accommodation.
6. Not budgeting for expenditures which arise irregularly, such as insurance, vacation, Christmas, TV cable, subscriptions.
7. Not budgeting at all.
8. Buying on impulse instead of shopping around and evaluating alternatives.
9. When investing, trying to make a quick buck instead of going for a slower, surer return.
10. Making investments such as savings accounts or whole life insurance policies, on which the interet rate does not keep pace with inflation, with the result that one is actually losing money.
That was thirty-five years ago, so, what changes would I make today? Just two:would drop numbers 4 and 10.
Even though it is a personal financial planning mistake to own a car you can’t afford, I suspect that number four got on the 1978 list because the editors asked me to rank the mistakes in order of frequency, not in order of devastation. It certainly wouldn’t qualify for the list today.
Number ten was on the list because inflation was a major problem back then and people were being fleeced by “investing” in whole life insurance policies that overwhelmingly favoured the insurance companies. Today, inflation is not a major problem and people are far savvier when it comes to buying life insurance.
The replacements for numbers four and ten would rank at number nine and ten on my current list. (See my January 21, 2012 column for the complete list and reasons.)
Current number nine is: Making investments that you can’t really afford. If you have to borrow money to make an investment then you have to consider whether you can really afford it. If you borrow to buy stocks, mutual funds, or a condo to rent out, sharp increases in interest rates, significant drops in the market, or the need to get your cash back for other purposes could all force you into panic moves prompting you to sell at a loss. And in these cases the loss is usually significant. On the other hand, if you can afford the investment you can wait out such financial storms. This mistake was around thirty-five years ago and should have been on the list rather than the warning about cars.
Current number ten is: Thinking the future will take care of itself. It’s well recognized these days that we have to plan prudently for long-term requirements such as children’s education and our own retirement. We also have to prepare as well as we can for emergencies such as the death of a breadwinner, the collapse of a business, the return of high inflation, or spiralling interest rates. But, back in 1978 this was not the prevailing attitude. I’ll give you two illustrations.
Around the time I prepared the original list I often hosted financial phone-in shows on CFRB 1010 in Toronto. When I cautioned callers about retirement planning, invariably I would be told that they had gold-plated pension plans that would more than adequately take care of them. I wonder how many of them worked for Nortel or GM.
I remember attending a lecture in the mid 1970s, given by one of the most respected economists of the day. He actually said that anyone who was saving money for their children’s education was crazy because within ten years all education in Canada, from kindergarten to a Phd, would be free. Which reminds me of my favourite definition of an economist: an economist is a person who, if you lose your telephone number, will estimate it for you.