5 financial traps you should avoid

We’ve all made a few bad financial decisions in our time. With so much choice on offer, and with so little time to make our decisions, it’s often difficult to know whether we really are making the most of our money.With that in mind, here are a few things you may not have considered – and which you’d be well advised to think about – when you’re trying to get your finances in order.

Holding multiple credit cards / overdrafts

Used properly, credit cards and overdrafts can be very useful. They provide a ‘safety net’ against unexpected costs, and in the case of credit cards, can offer automatic protection against losing money on your purchases (if the item turns out to be faulty and the retailer won’t offer a refund, for example, or if you’re a victim of credit card fraud). However, with any credit that’s available to you comes the temptation to spend it. That’s fine providing you can afford the repayments, but it might only take a small change in your circumstances to change that.

Many of us have more than one credit card or overdraft facility, and while this might give us more protection in the short term, it also means more exposure to (potential) debt. For many of us, just one credit card and/or one overdraft is probably enough.

Staying loyal

A lot of us have companies or brands that we’re ‘loyal’ to – our favourite supermarket, for example, or our favourite brand of clothing. But when it comes to money matters, staying loyal is normally not the way to get the most out of your money. Whether it’s energy providers, broadband, current accounts, savings accounts or any number of other essential services, there will probably be a number of companies in competition for your money. It’s up to you to make sure you keep an eye out for all the best deals.

There are plenty of online comparison websites to help you with this. But keep in mind that some companies don’t work through these sites, so it’s worth having a look around yourself, too.

Special offers

Discount deals and other special offers can help you to save money. But stop and think for a minute: are retailers really trying to help us out?

A retailer’s goal is to make money, and special offers are designed to make us part with our money more easily.

That’s not to say some special offers aren’t a good thing. Offers like ‘buy one get one free’ are an obvious bonus (as long as you need two), as are discounted prices. But many people fall into the trap of buying things just because they’re on special offer. The result? You’ve spent more money than you intended.

Then there’s the ‘x items for £x’ special offer. In some cases, this can represent good value. But, for example, it’s not unusual to see offers like ’3 for £3′ when the item on its own costs £1.05p – so the special offer is saving you a mere 15p. Unless you were planning on buying three items anyway, this probably isn’t worthwhile.

Over-insurance

In today’s society, many of us are proud owners of a vast range of gadgets and goodies: mobile phones, MP3 players, laptops, bikes, musical instruments, etc. It’s understandable that we worry about losing or damaging these items, and insurance companies offer a convenient solution to this worry.

However, if you’re offered insurance on a new purchase, check you’re not already covered. For many items – even things you’ll take out of the house (such as your mobile phone) – you may already be covered by your home insurance.

Even if you’re not already covered, the overall amount you can end up spending on insuring your belongings individually might come close to the cost of simply replacing the items outright.

Subscriptions

Magazine or newspaper subscriptions might look like good value at first glance: you’ll usually get a certain number of issues for a lower overall cost than if you’d bought them individually.

However, the important factor here is often how you’re paying for it, rather than how much you’re technically spending. It’s fair to say that most of us can afford, say, £5 a month for our favourite publications. That’s a total of £60 a year – but, crucially, that cost is spread out over the year.

Even if you can buy a subscription for a ‘cut-down’ price of £50, is this actually a better deal? You may be ‘saving’ £5 a month for the remaining 11 months of the year, but that £50 one-off payment will make a more significant dent in your finances in the month it does occur.

In terms of good financial management, it often makes much more sense to simply pay the monthly price once a month, as you won’t be ‘tied in’ to a deal and can simply choose to do without if finances are tight in a particular month.

Depending on your circumstances, the same might apply to things like gym memberships or your TV licence.

How can anyone define “value”?

When thinking of value, think of this: What would a company be worth to another company as a business? Every company has a certain value, which can be fairly well-defined, when viewed in this light. But this is a far different concept of value than the one under which Wall Street operates.
The actual value of a stock—as a business—is only fleetingly related, if it is related at all, to the gyrations of the stock market. Again, depending on shifting earnings forecasts or interest rate fluctuations, stocks can move all over the place, like a ship passing another ship on a foggy night, without even knowing it’s there. The only time this concept of value matters is when someone is willing to step up to the plate to pay that value. In other words, when a takeover bid takes place.
My concept of a “value” situation, therefore, is: stocks that are selling at clearance-sale prices, significantly below their value as a business, where there is a reasonable possibility that someone will step up and offer to pay that value, thereby forcing the stock market to reflect that value in the stock price.
When this happens, a normal, run-of-the-mill stock that is at the mercy of all of the variables discussed here becomes a superstock. It immediately rises to its true value level—as a business— and it is no longer subject to the whims of the stock market and all of the unpredictable variables that determine where most stocks trade.
You may think that choosing stocks that are likely to become takeover targets is an impossible task. The reason why you may think this way is that you’ve probably heard this refrain over and over again from Wall Street commentators who are obsessed with earnings forecasts and stock market projections and who have no experience when it comes to selecting logical takeover candidates. But picking takeover targets is notan impossible task.
As an individual investor, you can uncover neglected and undervalued stocks that are not only selling at a discount to their value as a business, but that also have a reasonable possibility of being forced higher by a takeover bid.
By the time you finish this series of posts, you will look at the stock market and at stock selection in an entirely different way. You will become aware of news items and the availability of certain types of information that most investors are completely unaware of. You will be on the lookout for superstocks.