Avoid these pitfalls that can erode financial gains

Today as I mark my fourth year as a regular columnist for this newspaper, I wish to share with you the numerous pitfalls to sound personal finance that I have observed over the period.

They include some bad decisions that affect on one’s financial independence. These include;

Exercising reservation in personal financial planning

Most people seeking advice on money matters often hold back information from their personal financial advisors.

Just like in medical practice, supplying limited information will not give the practitioner a clear picture of your financial situation and therefore the advice he offers may not work.

If you do not trust him, look for another expert.

Substituting emergency fund for insurance

Emergency fund and insurance plan protect against risk of financial loss. But the two plans are tailored to meet different specific needs. They cannot be substitutes for each other.

The emergency fund complements an insurance plan in situations where the policyholder has suddenly lost his or her job and cannot keep up premium payments.

In such cases, the insured would dip into his emergency fund for upkeep as he seeks an alternative source of livelihood.

But where one does not have an emergency plan, sustaining premium payments can cause financial distress and default in payment.

Processing a claim for compensation or financial benefit may take a long time and one requires an alternative source to meet his monthly expenditures. This is where an emergency fund is vital.

Treating a salary or pay rise as a windfall
Most workers tend to treat a raise as a windfall that was not planned for and that should not be tied to their financial plans.

This attitude is destructive. Whenever you get a pay rise and fail to review your financial plans to adjust to new income, you will always note a lapse in your financial situation, with your expenditure increasing to mop up the increased income.

A raise should give you the financial muscle to afford or pursue goals that seemed out of your reach.

Borrowing to buy stocks /securities

Borrowing money to invest in stocks is a risky affair that should be discouraged especially where one has no alternative source of income to repay the loan.

If you must borrow, ensure you have a repayment plan and that you know where your the cash would come from before you can liquidating your stocks.

You can channel a portion of your salary or some cash-flow from your business into repaying the loan.

And if you have to undertake a collateralised loan using the securities, remember to borrow for the shortest time but invest for the longest time to minimise possible losses. This follows the rule that the longer the repayment period, the higher the amount of interest payable for a loan.

Likewise, when you invest in stocks for the long term, any shortfalls or devaluation resulting from volatility of share prices would be overcome by returns earned in subsequent years.

Borrowing a loan without a proper plan

Debt burdens often results from lack of planning and poor control of expenditure.

A proper plan for a loan includes detailed repayment strategy which shows how you will service the loan on your income without any difficulty.

Forget credit if your financial health cannot allow you to make monthly repayments.

While planning how to spend borrowed money, you should compare the cost on the interest on the loan with the returns you expect from the use of the cash. If it is to finance a business, the revenue generated should be sufficient to cover the interest cost and still earn you some profit.

Keeping off from loans to preserve a credit report

Keeping off credit transactions can only preserve your credit history if you are sure you cannot pay your debts promptly.

Otherwise numerous credit transactions with positive repayment record will go towards enriching your credit history hence your credit report.

Mr Opiyo is Personal Financial Advisor & Coach.