Welcome to Episode 04 of Moneystepper’s 2015 Savings Challenge Podcast. This episode is focused on a recent survey we completed asking 10 Chartered Accountants what money mistakes they make!
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The full transcript of this episode is below, where you will all related links, articles and free resources:
I’ve been running Moneystepper for over 18 months now, and have been thoroughly enthralled by the world of personal finance for a lot longer than that. One of the main reasons that Moneystepper exists is to try to help people address their financial leaks in order to make the journey up the steps to financial freedom as smooth as possible.
Before starting Moneystepper, I spent many years at a Big4 accountancy practice in the UK. Accountants, as well as being infamous for being “apparently” dull, are also considered to be amongst the people who are best at managing money.
Therefore, I thought it would be extremely interesting to survey 10 of my former colleagues (all of whom are Chartered Accountants) to determine how good they are with money. If I could find leaks among this group of people, I imagine that they would be even more common across the UK population as a whole.
The survey included 10 questions, all of which we will analyse today in detail. Note that all questions are worded negatively as being a “mistake” and hence a good result in the survey would be a low number of people out of the ten surveyed making the mistake.
1. Do you use a credit card, but fail to pay it off in full every month?
The first question is one that I hoped that people who are educated with money would not fall foul of. As any reader of Moneystepper will be fully aware, incurring interest on credit cards is not something that we would recommend that anyone does. It well and truly falls into the “bad debt” category and will be a significant obstacle for anyone trying to improve their net wealth.
Survey result: 1/10
I’m pleased to say that these Chartered Accountants understand this! However, the general public may not understand this to the same extent. This is demonstrated by some key statistics:
- At the end of 2013, 4% of cardholders had only made minimum payments for 12 previous consecutive months. Over 2% made only minimum payments for 24 months. These do not include 0% interest accounts, but rather people who are incurring interest and who are only paying the minimum.
- The average interest rate on credit card lending bearing interest was 17.85% in October 2014.
- In the UK, only 40% of consumers pay off outstanding balances in full each month or pay 0% interest.
A couple of these statistics really stand out to me.
Most significantly, the fact that 4% of cardholders have only made minimum payments for the last 12 consecutive months is concerning. I would suggest that this is partly due to a lack of understanding of the impact of making minimum payments. The Money Charity highlights in their December 2014 statistics update that it would take the average household 25 years and 3 months to repay their credit card debt if they only made minimum repayments. That’s a lot of wasted interest!!
Lesson: Avoid paying interest on credit cards. Wherever possible pay down the full amount monthly. If this is not possible, use 0% balance transfer credit cards whilst paying down your outstanding credit card debt.
2. Do you use a credit card, but don’t receive cashback/rewards for doing so?
Cashback and reward credit cards have been popular for many years now, and so I would expect the majority of people (especially Chartered Accountants) to be benefitting from cashback and rewards when they are using their credit cards.
Survey result: 2/10
Whilst only two from the ten people surveyed weren’t taking advantage of reward credit cards, it still seems like a waste for these people. According to 2013 data, the average annual spend in the UK on debit and credit cards is around £10,000 per year.
With up to 5% cashback available of certain credit cards for the first 3 months, it’s fair to assume that the average credit card holder could be earning the equivalent of 1.25% cashback on all expenditure.
Therefore, for anyone using a debit/credit card, but not taking advantage of cashback or reward deals, this could be costing you a minimum of £125 per year. Granted, this isn’t a life changing amount, and I agree with the argument that no-one ever became wealthy through reward points.
However, it is still effectively “free money” if you pay off your credit card in full every month, and hence you could be losing out.
Lesson: If you are using debit or credit cards to make payments, then you should register for a cashback or rewards credit card to ensure that you get something back for using your cards.
3. Do you spend money online, but don’t earn cashback through online “money-back” websites (for example, Quidco)?
Another source of “free money” when shopping. As well as the cashback and rewards available through using specific credit cards, consumers can also earn cashback on the majority of their online expenditure by using cashback websites, which effectively pay a “commission” for referrals back to the end consumer.
Survey result: 4/10
According to City AM, people in the UK now spend an average of £2,000 a year on online goods. For all of this spending (and for spending that people typically do not usually make online), consumers could be obtaining cash back through these sites.
For instance, in the last 2 years and 9 months, I have personally earned £1,490 in cashback through Quidco by making all of my purchases online through the site (hotel bookings, car insurance, utility contracts, mobile phone contracts, etc, etc).
Lesson: If you are buying products or services online anyway, visit cashback websites before making your purchase to earn cashback on your purchases.
4. Are you unaware of where your pension is invested and why it is invested there?
I think that most of us understand the importance of personal pensions. We all want to have a comfortable retirement financially and know that the state pension will not provide what most of us want from retirement. Therefore, given its importance to our long-term financial success, I would hope that everyone understands where, how and why their pensions are invested where they are.
Survey result: 4/10
Well, the majority do of our survey do know the ins and outs of their pensions. However, this is still one of the most important and concerning points to take away from this survey. Other than Financial Advisers and Pension Specialists, Chartered Accountants are probably the best placed o have a thorough understanding of what their pension means and how it is invested.
However, out of the ten Chartered Accountants surveyed, four weren’t aware why their pension was invested where it was. This means that this figure will be MUCH higher for the general population and this is a concern.
Pensions and investments are a complicated subject. However, with so much of your financial future dependent on the long-term performance of these accounts, understanding the ins and outs of your retirement accounts is absolutely vital.
My largest concern is that people don’t understand the impact of fees in their retirement accounts. The vast majority of people make a “low, medium or high risk” choice and their involvement ends there. However, as our article on passive vs active investing showed, investment returns are being slashed due to high fees charged by certain funds and their managers in exchange for below average long-term performance. Not a good trade off…
Another concern was one of the specific responses I received. To quote: “I have chosen an investment profile but I cannot honestly say I fully understand it. I also have spoken to an FA but they were not able to really add any more clarity other than ‘this may be less risky that investment option x depending on market conditions’. ”
This highlights how complex this type of thing can be. It also highlights that this respondent probably needs to find a new Financial Advisor who understands, or at least who can better explain, their investment options in their retirement accounts.
Lesson: Take the time out to understand everything about your pension and how it is invested. It can have an immeasurable impact on your retirement (which could last for several decades) and hence it is integral that you nail this!
5. Do you contribute less than the “maximum employer matching” to your pension?
Whilst many people don’t appear to fully understand why, how or where their pensions are invested, we would hope that people at least are making the most of “employer matching” schemes when it comes to their pensions.
Survey result: 1/10
It seems that our respondents do understand the importance of the employer match. Effectively, an employer match on your pension contributions equates to a pay rise. Its free money and not contributing is a huge financial mistake. Not only do you miss out on this “free money” when it is matched by your employer, you also miss out of all the future effects of compound returns on this amount which would have been contributed by them.
The impact of the employer match, however, is even more powerful that I first realised. We have demonstrated this in our article on whether you should prioritize paying down debt or contributing to retirement. Whilst traditional advice is usually to pay down debt first, you would actually need a VERY high interest rate to make paying down debt a better financial decision than maximising your employer matched pension contribution.
In the related article, there is a free spreadsheet that you can download and run your own numbers to work out whether you should be paying down debt or contributing more to retirement. Check it out.
Lesson: In almost all situations, you should be aiming to make pensions contribution up to the maximum amount that is matched by your employer.
6. Do you have cash savings (ISA or Savings Account) with no specific intended use for the cash?
In my experience with Moneystepper, this is one of the most common mistakes I’ve noticed. In the long run, the returns (interest rates) from cash savings rates struggle to exceed inflation. In the current environment (since the 2008 economic crisis) they are actually below inflation. This means that, at best, your cash savings are staying at the same value, and are probably losing value currently.
The clear benefit for cash savings are that it is stable and you can guarantee your returns. Therefore savings accounts are a great “store” for cash that has a short-term mission. Maybe you are planning to buy a house in the next couple of years and you are saving for a deposit.
However, I’ve noticed that people often use savings accounts to store cash that has no intended purpose.
Survey result: 7/10
Our Chartered Accountants are no different. Most Chartered Accountants (myself included in the past) spend their days looking at companies’ financial accounts. They understand that capital invested in businesses provides the returns for the shareholders of the business, whereas cash sitting on the balance sheet (beyond that required for specific short-term ventures or as an “emergency fund”) is not the best use of the resource.
However, most people fail to equate that to their personal lives.
Lesson: Either your cash savings should be set aside for something very specific in the next 3-5 years (or a pre-defined amount for “emergencies”) or it should be appropriately invested in assets which provide higher long-term returns, such as equities or real estate.
7. Do you fail to maintain a monthly written budget?
For anyone who follows Moneystepper will know, the written budget is one of, if not the, most effective weapons in improving long-term wealth. Measurability is absolutely fundamental in long-term success and it’s no different when it comes to your personal finances.
Survey result: 5/10
This is the most surprising of all the responses in my opinion. Like Ant & Dec, like Strawberries & Cream, like Christmas & over-eating, accountants and budgets go hand in hand. All of the people surveyed deal with budgets and forecasts in their daily working lives. They see first-hand the importance of these in the success of the businesses which they work with.
However, half of the Chartered Accountants surveyed do not actually keep a personal written budget.
Without understanding where your money is going, it’s impossible to improve and optimise your financial position and improve long-term wealth.
Fortunately, now is a great time to resolve this. Below you will find a link to both the Moneystepper 2015 Savings Challenge and a free resource to help you budget, helping you define both your personal balance sheet (equivalent to your net wealth) and your profit and loss statement (equivalent to your income/expenses each month).
8. Have you taken our insurance/warranties on products that you can afford to replace?
This is another common mistake that I notice and one that is generally caused by the influence that the insurance industry has itself. There is such pressure with taking out insurance products that the end consumer will often feel that they are being “financially irresponsible” for not taking our insurance or warranties on products, services or life events.
Survey Result: 2/10
Fortunately, most people in this survey are not affected by this. However, for 2/10 people to have done this when they fundamentally understand that these insurance/warranties are “negative EV” in the long-term still highlights that there is an issue here.
It’s important to remember that with all insurance, your thought process should always be the same:
- Do I legally require the insurance?
- Can I afford the consequences of not taking out insurance?
- If I buy a new TV, I’m never going to take out insurance because I’m not legally obliged to do so and I can afford to replace the TV if it breaks (and note that if you cannot afford to replace it if it breaks, you shouldn’t be buying that TV in the first place).
- For my car insurance, I’m legally obliged to take out insurance, but I take out a lowest level I can as I can afford to self-insure.
- For life insurance, if my dependents shall be able to live comfortably on their inheritance if I die, then I may not need cover. However, if they cannot, I should take the appropriate level of cover so that they will be financially supported, but not any amount higher as the premiums will exceed what is required in this situation.
You must remember that insurance is ALWAYS negative EV: it always returns less in the long-term than you pay in premiums. How do you know? Well, even after insurance companies pay their thousands of staff healthy salaries every year, pay their executives millions in bonuses, cover their huge expenses for inner city offices, etc, they still manage to create a profit for their shareholders. Where does all this come from? Your premiums.
Lesson: For every type of insurance, determine the cost you are paying in premiums compared to cost of what you are insuring. If you can afford to “self-insure” (i.e. keep the money aside to replace the product/service) then this will be better in the long-term (although you’ll have to be willing to incur some short term costs).
9. Have you not got a written will?
If you die without making a will there are certain rules, called the rights of succession, which will dictate how your money, property or possessions will be allocated. This may not be the way that you would have wished your money and possessions to be distributed.
This is usually most important for couples who are not married who wish for their partner to benefit from their estate, for couples with children who may want to name legal guardians if both parents were to pass, and for those leaving more than £325k in their estate, where writing a will may help reduce or avoid any inheritance tax.
Survey result: 9/10
The largest area where people have made a “mistake” in the survey. It is worth noting that out of these nine people, three are married without children and hence they are happy that the standard legal rules would distribute their estate in accordance with what their written will would state if they were to write one.
However, this still leaves the majority without a written will and hence their assets may be distributed after their death in a manner which they would not have necessarily chosen themselves.
Additionally, it’s worth adding that everyone should have “instructions” written upon their death which outline what and how things should be done upon their death. It would obviously be a horrendous time for loved ones and hence anything to make the process a little smoother would probably be appreciated (and that way you get to choose some awesome songs for your funeral…)!
10. Have you failed to maximise your ISA contributions?
Tax can be a significant obstacle to creating long-term wealth. Therefore, for any savings or investments held outside of retirement accounts, we suggest that as much as possible is held within ISA accounts (especially for longer-term investments).
Survey result: 7/10
As per the last budget, ISA limits went up to £15,000 per year for 2014 and will increase again in 2015. Therefore, whilst the people in the survey are above average salary earners, most are in former colleagues of mine and hence between 25-35 years old. It is not unusual therefore that many have not maximised ISA contributions for the year when people are buying houses, having children and incurring other such short-term expenses.
However, it’s essential that we address the importance of tax wrappers. Imagine you invested £10,000 a year for 40 years, at 8% annual return.
If all funds where in a “tax-wrapper” such as an ISA, your £10,000 investment each year (£400,000 total invested) would be worth £2.8 million.
However, if this was instead taxed in the higher earner bracket, your final worth (for the same £400,000 invested) would only be £1.2 million. You’ll lose a whopping £1.6 million to the tax man and no-one wants that!!
Lesson: When saving and investing, always think about the long-term impact of taxation and shield any gains where possible from unnecessary taxation.
From this survey I’ve taken two key points away:
- No one is perfect
- Even people whose job it is to manage money (or give opinions on others who do so) make common mistakes in managing their own finances
You may be wondering why I asked these survey questions. Well, around 5 years ago, when I qualified myself as a Chartered Accountant, but before I started to take a keen interest in my own personal finances, I was guilty of making all 10 of these mistakes myself!
Each of them individually will act as an obstacle to creating long-term financial wealth. Therefore, if you can knock some of them down, then the road to financial freedom become a lot smoother!
Let me know – do you make any of these “financial mistakes”? Are there any other common mistakes you notice that people (even those who are financially educated) make? Let me know in the comments below.
So, that’s the money survey done, and we have something else very exciting going on today. The Moneystepper Savings Challenge podcast is now live on iTunes ready for the New Year. If you haven’t already, get yourself over to www.moneystepper.com/intro right now and submit your 2015 annual goals. I can’t wait for the New Year and to get started properly with the challenge and to start interacting even more with the Moneystepper Savings Challenge community.
Whatever you have planned for New Year’s Eve, I hope you have a great night and I wish you all the best for 2015. When the New Year arrives, it brings new ideas and new hopes for us to make our lives better than the year just past. I hope 2015 brings you much happiness and success in all of your endeavours. Happy New Year and, as always, keep on climbing.