Yesterday, a journalist writing for a financial magazine asked me this question:
What are the biggest ways Australians waste money when it comes to their finances?
Here’s my answer:
Saying Nothing When Your Bank Raises Interests Rates
One phone call can save you thousands of dollars.
When the Murray review into financial services recommended banks increase their capital reserve requirements last year, the banks leaped at the opportunity to raise your mortgage interest rate.
I told my affected clients to call their bank and say: “I’m unhappy and thinking about changing to another lender”. Those clients who took the time to pick up the phone had their rates reduced – almost everyone had their rates reduced back to the same level they had before the increase, only days before. Clients averaged over $1,000 p.a. in savings at a cost of 15 minutes on the phone.
It costs your bank thousands of dollars to replace you.
So, rather than risk losing you, banks allow their call centre staff to provide instant interest rate reductions over the phone, for anyone who bothers to call and complain about a rate rise or suggest they can get a better deal elsewhere.
The banks know that if they increase rates, most people will take it. While some borrowers will take their business elsewhere, lenders (reliably) count on most people doing nothing.
And another point to note….
In my experience, people have wildly different rates on their mortgages. Most of the banks increase your rate over the life of your loan – and you can quickly find you have an uncompetitive mortgage. Your bank will not offer you a decrease without you prompting them, but is likely to provide a reduction if you call and threaten to take your loan to another lender.
Try this with your credit cards also – it works just as well.
And, send me your details and I’ll provide an independent review of your mortgage.
Not Using Cash Flow Management Technology
Savvy Australians are using cash flow management technology that automatically monitors their spending habits and tells them how they can free up extra money, without drastically affecting their lifestyles.
If you are prepared to commit to a spending and savings plan, there are apps and websites that will tell you when you are over spending and on what.
In 2 minutes, you can securely plug your bank and credit card data into a cash flow tool and set up your budget. Quickly, you can see how much you are spending on restaurants, alcohol, clothing and so on.
One of my Sunshine Coast clients, realised her family was wasting a lot of money calling into the local IGA each night to pick up food items for dinner. A little organisation meant they saved thousands a year.
It’s not rocket science, but it’s effective.
I tested several cash flow tools (all that I know of). Money Brilliant correctly categorised the highest number of transactions and was the most simple to set up. They offer a free version, but the $9.90 / month version had the best reporting of the tools I reviewed. At a minimum, I recommend you trail the free version and go back through your last few months worth of spending.
Paying the Retail Rate for Life Insurance
Insurance is probably your household’s second biggest financial cost (next to mortgage interest), and costs you thousands per year.
Commission inflates the cost of insurance by as much as 32% p.a. Generally, holding your Life and Total and Permanent Disability insurance through superannuation is appropriate for most people’s situations. Your industry fund is one place you can purchase cover and avoid commission. However, for most people, income protection is better held outside super.
Unless your purchase cover through your industry fund, every insurance policy has an inbuilt cost that covers potential commission that goes to brokers or the websites that rate insurance. If you go direct to the insurer, they simply pocket that fee, without passing it on to you (they won’t undercut their 3rd party sales force).
The only way to avoid this cost is to get a wholesale rate. Unfortunately, very few advisors will lodge your insurance application without the commission built into it (or they don’t get paid). I recommend you at least discuss your insurance with an independent advisor. If you decide to go ahead and get advice, you will have to pay a separate fee for this service, but the savings (by avoiding commission) can reach tens of thousands of dollars over the life of your insurance.
And if you already have your cover in place, an independent advisor can refund that commission back to you. If your advisor is not independent, make sure they use this commission to pay for their ongoing service (and that it is outlined on your Fee Disclosure Statement). If your advisor isn’t open and comfortable discussing the commission they receive, then they probably know you’ll be annoyed at how much it is.
If you want to get an idea of the “retail” costs of insurance, you can use one of the rating sites. But be careful: all the ones I’ve seen either take a cut of commission by referring you, or they feature certain insurers in a separate section at the top of their list (I expect for a fee).
Over-Paying on Super and Investment Fees
Many Australians have their savings in expensive super or investment accounts. While it’s not as common as it was a few years ago, many people still pay up to 2% for investment and platform fees. You can get that cost down as low as 0.2% (without sacrificing platform or investment quality).
That additional expense amounts to $2,000 p.a. in wasted fees, for the average Australian couple. And this fee compounds to drastically reduce your savings over the long term.
Running a Self-Managed Super Fund When You Don’t Need One
Most people think they need a self-managed super fund (SMSF) to make their own investment decisions. But there are superannuation funds (similar to SMSF’s) that charge a membership fee of $200-$300 a year. And these “SMSF-type” funds offer you access to the same investments that most people think they need a SMSF to access, but at a fraction of the cost.
If you set up a SMSF thinking it was the only way to invest your super into shares and exchange traded funds, then you are wasting your money (and your time and energy managing your own fund).
Start with #1 and call your bank now (and please send me a note letting me know how you get on).