Five really bad personal finance ideas

Cowboy philosopher Will Rogers once said, "Good judgment comes from experience, and a lot of that comes from bad judgment."

The Depression era entertainer lassoed a lot of us in that quote when it comes to making bad financial decisions. There's no doubt making mistakes is part of life, but not learning from them is foolish.

Here are some of the more regrettable ideas:

Open ended monthly payments

Adults never really shed that childish desire to want neat stuff and telecom service providers know that. Most of us have heard at least one story about a cell phone or Internet bill that got totally out of control. It almost always starts with a reasonable introductory rate with certain limitations, which the subscriber expects will never be exceeded. After a few months the user tends to get comfortable with the phone and careless with the usage.

Limited Internet and phone plans are nice if you have the discipline to control your own usage. If not, most providers offer online details of your account including current usage. Some offer alerts when you hit your limit.

If you exceed your limit regularly, consider a plan better suited to you. Most providers are only too happy to upgrade customers to unlimited or flexible plans to cap monthly payments. In the end it will probably cost less, or at the very least provide a fixed cost so you can keep tabs on the billing department and stick to your budget.

Also, when your contract is up don't automatically renew. Competition has been heating up over the years. Hold out for a significantly better deal. They would rather get less than lose you as a steady customer.

Carrying a balance on your credit card

Credit card providers aren't exactly forthcoming with the interest rates they charge on balances owing despite efforts from regulators to make them more transparent. You have to wonder if the more than forty per cent of Canadian credit card holders with balances owing realize companies like Visa and MasterCard charge interest in the upper teens.

That's nothing compared with credit cards sponsored by big retailers like The Bay, which charges an initial rate of 29.9 per cent. At that rate a balance of $5,000 compounded monthly over one year would accumulate interest of $1,718.

With interest rates at record lows it's better to get a consumer loan at ten per cent, pay off the balance and accumulate $523 in interest after one year.

It's even better to pay it off and not make purchases unless you can afford them.

Withdrawing from your RRSP to pay debt

In most cases withdrawing from your RRSP before retirement is a very bad idea. Registered retirement savings plans were devised to help Canadian save for retirement and Ottawa does everything in its power to discourage early withdrawals by imposing withholding taxes. Tax rates vary depending on the amount withdrawn and an individual's income, but can be as high as thirty per cent.

In most cases there are other penalties and fees to add to the cost.

In addition, you miss out on any growth that money would have attracted in your RRSP and you can never recapture that contribution space if you want to put it back down the road.

There are exceptions if you lose your job or qualify for the Home Buyer's or Lifelong Learning Plan for continuing education.

Putting all your eggs in one basket

Investing is more than a series of unrelated wagers. That's gambling.

Prudent investors don't go for double or nothing until they have accumulated plenty of safe investments to cushion the blow from those risky ventures.

That requires a diversified and balanced portfolio of investments according to risk, sectors of the economy and a good mix of stocks and bonds.

If you set aside five per cent of your total portfolio for high risk investments a big loss could be absorbed by the remaining 95 per cent, and a big gain…is a big gain.

Loads on mutual funds

One sure fire way to boost investment returns is to pay as little as possible on fees. If you own a mutual fund you normally have to pay an annual management expense ratio, or MER, which is based on a percentage of the total amount invested.

A portion of the MER, called the trailer fee, goes to the person who sold the fund every year it is held for ongoing advice like — "I think you should buy this fund with the high trailer fee."

There's not much you can do about MERs if you want to own a mutual fund, but some fund companies also charge one-time fees known as loads to further compensate the person who sells the funds for advice like — "I think you should buy this fund with a high load."

A front end load is a one-time fee based on a percentage of the total amount invested when the fund is purchased.

A back end load is a percentage charged when the fund is sold. In some cases it's the investor's choice to pay now or pay later. Keep in mind back end loads tend to get smaller over time, but if the fund goes up in value the total fee could be much higher than a front end load.

Avoid funds with loads.