The worst money lies we tell ourselves

Not that I am incapable of creating my own list of do’s and don’t’s, but the following from MSN Money author, Jason Buckland, speaks to the heart of the follies that so many of us buy into.

"The calendar now reads 2012, which means a new year and a new lease on our cash. This will be the year we save more. This will be the year we spend less. This year, damnit, will be the one we finally figure out how the TFSA works!

Of course, for many Canadians, 2012 won't be any of the above, and chances are many broke Canucks will leave the New Year just as they entered it. But fear not. In a bid to shed the status quo this year, here is a rundown of some of the worst, self-perpetuating money lies we tell ourselves, and how you can avoid committing the same financial follies in 2012.

'But I get rewards when I use my credit card ... '
Look, rewards cards are great. They really are. If you run all your consumer and household spending through a credit card - let's say $20,000 annually, for argument's sake - even the most conservative 1 per cent cash back rewards card will net you a credit of $200 at the end of the year. In many ways, that is free money. Of course, a rewards card is only a perk if you can afford to pay your statement each month. Because, if you can't, and you've racked up as much of your spending as possible on your credit card to increase cash back eligibility, you're in for a real world of hurt. Consumers ought to weigh the risk of $20,000 subjected to near 20 per cent annual interest when salivating over that $200 cash back carrot.

'Look how low the monthly payments are ... '
Older generations bemoan the monthly payment. Indeed, there may be nothing more baffling to those who grew up in the 'you have equity or you have nothing' era, but today is the day of the payment plan, and it's how an alarming number of Canadians do business. For many Canucks, monthly payments are an unfortunate necessity, and relying on them for big ticket purchases like a car, for example, might not be the devil incarnate. But paying off smaller buys like clothing, electronics or furniture, even if stores advertise zero per cent interest for your first 12 months, is surely a sign of flawed financial sense.

'It's interest-free for 12 months ... '
One slide bleeds into the other. As discussed on this feature's last page, retailers love offering interest-free financing almost as much as consumers love accepting the offer. Yet once again, the fine print will be a killer for unprepared shoppers. As an example, Sears Canada offers its shoppers interest-free payments on purchases for 12 months, but the deal is rife with catches. First, purchases must be made on the Sears Financial Credit Card, which exposes shoppers to a sky-high annual interest rate of 29.9 per cent. And second, in order to become eligible for a year's worth of interest-free payments, shoppers must pay minimum payments each month, but also fork over a $74.99 administration fee (except in Quebec) to kick start the payment process. For consumers, the words 'interest-free' should often be equated with 'run away.'

'I don't make enough money to save ... '
It is a bit ironic that the very people who need to save, the ones who don't know where their paycheques will come one month, six months, one year down the road, are the least capable to save. Such is the case in Canada, though, where consumers contribute, on average, less than a quarter of what they're eligible to into their RRSPs each year. Any financial expert will tell you that, with respect to the TFSA, there is no better place to save each year than by stashing money into your RRSP, which can house as much as $22,450 of your annual income tax-free. Those not able to contribute to their RRSP each year, however dire their financial straits may be, would likely be better cutting back on some other kind of disposable spending (cable TV, etc.) in lieu of saving toward the future.

'It's on sale ... '
Of course it is. Around this time of year, when Canadians are still basking in the glow of their gifted iPads or Boxing Day-bought big screens, it's tough to argue that sale tags aren't good for consumer consumption. Yet if we can separate ourselves from the initial novelty of recent buys, it's a good bet that most of what sales tags do is lure shoppers into purchases they wouldn't be making otherwise. Consider the Boxing Day rationale: sure, a $1,000 LCD for $600 is a great deal, but if it's money you can't spend, that's no longer $400 you've saved, it's $600 spent you can't afford. If 'but it's on sale' is your reasoning, chances are you shouldn't be shopping in the first place.

'If I make any more money, I'll lose my benefits ... '
Canada is a great place because it takes care of those who can't. Can't earn their own living. Can't work. Can't raise a family by themselves. Yet to oversimplify a very, very complicated issue, a nasty cycle is often born anytime a Canadian enrols to receive a benefit cheque. Take employment insurance, as an example. EI is a wonderful service designed to supplement a worker's income should they lose their job, while also allowing them to earn a certain level of cash without losing their benefits. Yet Canadians on EI, which pays out a maximum weekly sum of $485, tiptoe a sliding scale that can actually deter lower-income earners from returning to work. Canadians can take in $485 per week from employment insurance, but every dollar earned over $485 is deducted from their government-paid sum. So, if you find a job paying $500 a week bussing tables at a restaurant while on EI, in reality you could be taking home just $15 more than you could by not working at all (similarly, a job paying $400 a week might be rejected by some since they could take home just $85 less by sitting around the house). Even the most liberal of Canadians would acknowledge that social services have a way of fostering stagnancy among their recipients.

'But it's free ... '
Behavioural economists like Dan Ariely have written exhaustively on the concept of free, though perhaps we needn't look further than an example on infomercials to prove the point. The argument for free, of course, is that humans are suckers for it; if Product X is lousier than Product Y but Product X is free, we're more likely to grab the item that's of no cost to us, regardless of the qualities involved. After 1 a.m. each night, broke people are routinely lured by this plight. Near the end of your average infomercial, the 'but wait, there's more!' moment comes, and we watch how an incredible add-on can be ours for free - all we have to do is paying extra shipping and handling. Well, that's great, but we don't need a second set of containers for boiling eggs, and suddenly we've been duped out of a pricey postage fee for something we don't need (or even, in many cases, want).

'I'll only live once, and I can't take money with me ... '
In the rare case that you are 70-plus, have no family considered worthy of your estate and boast a particular penchant for Cristal, then by all means: blow it. Yet when Canadians get in trouble is when they're none of the above - not retired, not independent of family, can get by on lesser champagne - and still use the 'spend it or lose it' reasoning. Splurging is great, yes, and a heck of a lot of fun. But it all comes back to give-and-take. What's better in the long-term? Spending on material goods which give positive reinforcement for only so long, or not having to stress over mounting debts, choking credit card payments and the prospect that you could lose it all if you can't pay it off? Living within your means isn't glamorous, but if we saw anything from the great recession of '08, it's the only way to make it.*"

If you want to sit down and review your financial/cash management, do not hesitate to let us know as that is a major part of what we do with our clients.

Cheers
Brian