Distinguish between good and bad advice

With the enormous investment choices available it has become important to distinguish between good and bad advice.

With the enormous investment choices available it has become important to distinguish between good and bad advice.

Some ideas might seem sound advice but could turn out to be bad advice.

Bad advice: My wife does not need to join the pension fund. Many husbands advise their wives not to join company pension or provident funds because she will probably leave the company or will stay at home to look after the children.

Better advice: When you join these funds, your full contribution is invested for you.

All administration costs as well as group life assurance disability cover costs are paid for by the company. So onwithdrawal from the fund, you have enjoyed benefits that, if you had bought them yourself, would have cost you between 15percent and 30percent of your contribution.

Remember, when you leave a company you are entitled to convert life cover without having a medical examination.

Bad advice: Borrow on your insurance policies to pay off debt or to make another investment.

Better advice: There are various ways in which insurers calculate interest when you take a loan on a policy.

The first way is to chargedirect interest, which at themoment is between 18percent and 18,5percent As most policies achieve returns of approximately 12,5percent, the difference in interest is debited against the remaining cash in the policy.

This 5percent to 6percent difference will over the years deplete the remaining cash in the policy.

Bad advice: Have more than one credit card - it makes you a better credit risk.

Better advice: Keep only one card. The more cards you have the quicker you will find yourself in debt, and you will establish a good credit rating by using and paying off the debit balance as quickly as possible on one card.

Bad advice: Buy the investment product because it saves on tax. This might be so, but also remember that being able to deduct on your tax returns could save you up to 40percent, but you will still be out of pocket for the difference of 60percent.

Better advice: Compare the investment as follows:

Take the investment before tax, check the benefit at maturity and the tax consequences at the time. Some deductions made to save tax might result in some tax being paid at maturity.

Compare it to an investment in terms of which you pay tax up front, so that at maturity no further tax is payable. Once you have compared the results, you will be in a better position to make a decision.

Bad advice: The house you want is often just out of your price range by, say, R20000. The estate agent convinces you that it is an excellent buy and you should make a higher offer.

Better advice: Calculate how much cash you have. Remember, the cost of transfer fees, bond registration, moving, painting, curtains and so on.

Do not be tempted to make a bigger offer or you might have problems with payments later.

l The writer is chief executive of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail help@pioneer.co.za for more information.