Post-dating cheques is risky business

By MARY HOLM

I was aware that cheque laws changed recently, but I was not aware that the basic tenets of a cheque had changed: for example, a sum to be paid to a named person on a set date.

I find now that this is not so. I wrote cheques to the ACC and IRD dated December 15, 2001, and another to the IRD, a tax prepayment, dated December 31. The sums totalled $2618.80.

According to my HSBC bank statement, the cheques were cleared on December 10.

The "what ifs" are:

* What if the payments were dependent on salary cheques being deposited in time to clear the cheques on the dates nominated? If the cheques were cleared early, there would have been cheque bouncing fees for "insufficient funds".

* What about the loss of daily calculated interest in the account, paid monthly, on the $2618 odd for the December 10 to 15 and December 10 to 31 periods?

The bank's answer is that you should not issue post-dated cheques, and that it is up to the recipient to check the date before presentation. One would have hoped your bank would protect your interests/instructions.

This is one of those situations where there is a "what should happen" and a "what usually does happen", and it is probably best to find another way around it.

"It's a very common complaint I get," says Banking Ombudsman Elizabeth Brown.

"A post-dated cheque is an instruction from the customer to the bank to pay on or after the date, but not before.

"If the bank pays before the date, it's in breach of the instructions from the customer, so it should be responsible for any problems that arise.

"If you suffered a financial loss because the bank paid early, the bank should normally meet that."

If your bank doesn't agree, you can use its complaints handling service. There should be a leaflet about it in every bank branch, says Elizabeth Brown.

What your bank should have done, says another banking source, is send the cheques back to the IRD's and ACC's banks, saying they were post-dated and should be presented again on the right date. And those banks should have sent them back to the IRD and ACC.

In practice, though, it seems that many banks don't check the date on each of the thousands of cheques that pass through their hands - especially those for smaller amounts.

They would probably argue that if we want them to do that, it will take longer and cheque account fees will have to be higher.

Here are some possible ways around the problem:

* Get the attention of whoever you're paying the money to. You might circle the date on the cheque and write above it something like: "Please don't present this cheque until this date." Or attach a note to the cheque.

* If you're going to be away, ask a friend to mail the cheque close to the date on it.

* Pay by telephone or computer banking. You can then set the date on which the payment should be made.

A note about the missed interest you asked about: it usually amounts to a surprisingly small amount.

The highest interest you're likely to be earning on a cheque account applies if you have a revolving credit mortgage. In that case, if a cheque clears later, it's the equivalent of your earning the mortgage interest rate on the money in the meantime.

Currently, that rate might be around 6.5 per cent.

Let's say half your money, $1309, was cleared on December 10 when it should have been cleared on December 15. You would have lost about $1.17 in interest.

On the other $1309, which was cleared on December 10 but should have been cleared on December 31, you would have lost about $4.90.

Life's too short to get aggrieved over $6.

And if you had an ordinary cheque account, which would earn lower interest and it would be taxed, you would be hard-pressed to come up with $3.

Still, if you were paying really large amounts or dating your cheques several months in advance, you might want to use one of the suggestions above to make sure you don't lose interest.



A friend of mine has mentioned a "72 Theory" for shares, but I do not understand it.

Have you heard of it, and if so, would you please explain it to me?

I've heard of a "72 Rule" which applies to returns on all investments, not just shares. It's probably the one your friend was talking about. And it's really useful.

It goes like this: divide 72 by the percentage return you're getting, or hope to get. That will give you roughly the number of years it will take for your investment to double.

Examples: on a 4 per cent return, your investment will double in about 18 years. On a 10 per cent return, it will take a bit over 7 years.

You can use it backwards, too. If the value of your house, share fund investment or whatever has doubled in eight years, you've earned a 9 per cent return on it. If it has doubled in just six years, your return has been 12 per cent.

I've got no idea why it works, but it does.

What's more, 72 is rather convenient, as lots of other numbers divide evenly into it.

I use the 72 Rule often for off-the-top-of-the-head calculations.



Investors should be aware of financial markets' cyclical nature, and try to take advantage of this, as there can be, say, a 5-year cycle more or less.

The drop in prices for various financial products (shares, index funds, trust funds) caused by the New York tragedy was an ideal time for people to invest, because investors - including myself - overreact to bad news.

I would say leave your money on short-term deposits until a market downturn occurs, and then transfer cash funds to investment situations.

You can't always achieve this, but it is still better than investing your cash somewhere near the top of the market cycle and being locked in at a loss for four or five years.

As you say, you must be in for the long term. So why not wait and take full advantage of a market downturn?

To quote an article on the same page as yours a few weeks back: "Sell in haste, repent at leisure." This is precisely where you can buy to advantage.

To quote again: "History has shown investors often experienced boomer returns in the years following a global crisis." As the years go by the investor has not always the time left to ride out downturn cycles, and would be better off in cash term deposits.

You've got one of the messages that I keep trying to hammer home, that investments such as shares must be long term.

But you've missed another: don't try to time markets.

Everything you say would be valid if only we knew, at the time, that the markets had hit bottom. If only ...

To use your New York example, markets plunged right after the terrorist attacks.

So why didn't we all rush in to buy shares at bargain prices? Because we worried that prices would drop still further.

Your quote about high returns following global crises was just one of many similar messages.

Within days of September 11, we saw graphs showing that the sharemarket rose fast in the year following most other crises.

But, we all wondered, was this one different?

And I'm sure we will all wonder the same thing next time something extraordinarily bad happens.

As for a "five-year cycle more or less", there's so much "more or less" in any share- market cycle that it's useless in helping you try to time your purchases.

I agree with you that investing at a time that turns out to be near a market peak is really discouraging.

But trying to time markets is not the way to avoid that.

It's all too easy, if you're in and out of markets as you suggest, to miss out on a sudden bull run.

For all we know, world markets might zoom up, starting Monday. They might also plummet.

Heaps of research shows that those who get in and out of shares end up worse off than those who go into the market and stay.

So when should you buy?

By far the best strategy is to spread out your purchases, buying regularly once a month or every three or six months, regardless of what the markets are doing.

If you invest the same amount each time, you benefit from what's called dollar cost averaging.

This is best explained through an example.

The price fluctuations are rather extreme, but that's just to make it easy to follow.

Let's say you invest $120 a month for a year.

For four months of that year, the price of units in your share fund is $4. For another four months it's $10, and for the remaining four months it's $16.

That means the average price is $10.

When the units cost $4, you can buy 30. Over four months at that price, you get 120 units.

When the units cost $10, you can buy 12. Over four months at that price, you get 48 units.

When the units cost $16, you can buy 7.5. Over four months at that price, you get 30 units.

Over the year, you've bought a total of 198 units. You've paid 12 times $120, which is $1440.

But with an average price of $10, you would expect to pay $1980 for 198 units. You've saved $540. How come?

Without even thinking about it, you've bought more units when they were cheap, and fewer when they were expensive.

This works well for regular saving. But what if you've just got a lump sum, perhaps from an inheritance or redundancy money?

Because you won't know, until later, whether now is a good or bad time to buy, it's best to spread out your purchases of shares or share fund units. Set yourself a plan and stick to it.

You might invest a 12th of the money each month for a year, or a quarter every six months for two years. In the meantime, the rest can go into term deposits that mature when you plan to invest them.

The same applies if you're getting out of any volatile investment because you plan to spend the money over the next few years.

It's a good idea to phase the selling over a few years.

That way, you won't sell everything when prices happen to be particularly low.

There has been rather a lot of maths in this week's column. Good fun, eh!

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or email: Mary Holm.

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