6 common money mistakes that could cost you thousands

Want to take greater control of your finances? Making sure to avoid these common – and expensive  – money mistakes can be a good starting point.

We all make mistakes in life but not all of them have the potential to hurt our hip pocket. We have identified six common money mistakes that could prove to be expensive. Canstar has crunched the numbers to highlight just how much havoc they could wreak on your bank balance. Keep in mind these numbers are based on hypothetical scenarios but it’s certainly food for thought.

1. Thinking loyalty pays

Being loyal to your friends and family might be a good thing but being loyal to your lender could end up being an expensive mistake. Data shows that new customers still get a better deal on their home loan than existing ones – even though the gap has closed. According to the RBA, the interest rate margin between existing and new loans was 15 basis points in December 2023, down from 50 basis points in December 2022. Fifteen basis points may not seem that big a deal but on a $600,000 loan it could mean paying an extra $59 a month on your home loan repayments. Plus, your interest bill over the life of the loan would be about $21,000 more.

So, it certainly pays to review your loan on a regular basis and compare it to other home loans on the market. If you find you’re still getting a good deal that’s great but if not it might be worth refinancing to a lender offering a better rate. You could always talk to your lender before making the switch to ask if they’d come to the party with a lower rate so you can avoid the hassle and potential costs of taking out a new loan.

Home Loans: Existing vs New Customers

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Source: www.canstar.com.au – 12/02/2024. Interest rates based on RBA Housing Rates (December 2023); owner-occupier variable housing rates. Loan calculations assume a loan amount of $600,000, repaid over 30 years.

2. Not shopping around for insurance at renewal time

What do you do when your insurance renewal notice lands in your inbox? Do you make a note to shop around for a better deal or automatically renew it? A large number of Aussies opt for the latter. In the year to June 2023, 66.1% of household insurance policies were automatically renewed, according to Roy Morgan. Things were slightly better with car insurance. Roy Morgan research found that in the year to October 2023, 60.1% of vehicle insurance policies were renewed without even approaching another company.

This is another mistake that could prove to be costly. Canstar compared the average cost of five-star rated car insurance products against the market average and, as the table below shows, the difference can be as high as $1,074.

Canstar conducted a similar exercise with home and contents insurance policies and the premium differences range from $605 to $3,360 depending on where you live.

Average Annual Comprehensive Car Insurance Premiums by Profile
5-Star Rated Products vs Market Average

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Source: www.canstar.com.au – 12/02/2024. Based on comprehensive car insurance policies rated in Canstar’s 2023 Car Insurance Star Ratings. Premiums include quotes for both new and used cars for a range of scenarios, with a state-specific target excess ranging from $600 to $750.

Average Annual Home & Contents Insurance Premiums
5-Star vs Rest of Market

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Source: www.canstar.com.au – 12/02/2024. Premiums based on quotes obtained for Canstar’s 2023 Home and Contents Insurance Awards and Star Ratings (September 2023), for a range of addresses, property assumptions and building sum insured amounts. Premiums based on building sum insured amounts between $300,000 and $1,450,000 and a contents sum insured of $50,000. *North QLD is defined as the portion of Queensland north of, but not including, Rockhampton.

3. Relying on credit when there’s an emergency

Having an emergency fund that you can dip into if unexpected expenses arise is essential. While many experts recommend that you have enough money in your rainy day fund to cover three to six months’ worth of expenses, in this cost-of-living crisis that can be easier said than done. But that doesn’t mean you shouldn’t bother having an emergency fund at all and thinking you can use your credit card to pay for your car repairs or new washing machine. Even having a couple of thousand set aside can save you from a potential credit card interest bill.

Let’s say you need $2,000 to cover an unexpected expense but you don’t have the money so you pop it on your credit card charging 17.07% interest (this is the average purchase rate of personal unsecured credit cards on Canstar’s database). You then pay $100 a month towards that debt. Canstar’s calculations show that it will cost you about $370 in interest and it will take you two years to pay off the debt. This assumes you don’t add anything else onto your credit card and also doesn’t take into account the annual fee you may be charged.

4. Too much mindless spending

Most of us are guilty of it – mindless spending on small purchases. That little sweet treat when you’re at the shops or the latest home decor item you don’t really need from Kmart. But even these seemingly insignificant impulse buys can be holding you back financially.

If you spent on average $5 a day on mindless purchases you’d have spent $1,825 in one year on things you might not even remember buying! How much better would it be to end the year with that cash in your bank account instead? In fact, if you stashed $5 a day in a savings account paying 4.61% you’d have also earned $39 in interest. Keep adding that $5 a day into a savings account and after 10 years you’d have about $23,000 saved.

Of course, this doesn’t mean that you can never buy anything – it’s just better for your hip pocket if you don’t do it too often.

Saving $5 a day

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Source: www.canstar.com.au – 12/02/2024. Based on saving $5 per day in a bonus savings account with the average total rate of 4.61% (based on accounts on Canstar’s database). The initial deposit is assumed to be made today, and subsequent deposits are made at the end of each day. Interest is credited monthly.

5. Waiting too long to invest

When you’re young you might think you have plenty of time to start investing but the sooner you start, the more time compound interest has to do its thing. You might be surprised just how much better off you’d be if you don’t wait too long to invest.

Here’s a hypothetical example. Margot starts investing at age 25 and adds $200 a month to her investment. She does this for 40 years and earns 8.09% a year on her portfolio. When she turns 65 she will have $654,258 – $96,000 is what she contributed and the remaining $558,258 is the earnings from her investment.

Greg, on the other hand, doesn’t start investing until he is 45. Like Margot, he makes $200 monthly contributions to his investment and earns 8.09% a year. When he is 65 his investment would be worth $113,997 – $48,000 from what he contributed himself and $65,997 from the earnings. It’s still a tidy sum but waiting until he was 45 to start investing means he has about $540,000 less than Margot who started investing at 25.

The benefits of investing early

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Source: www.canstar.com.au – 12/02/2024. Annual returns based on S&P Global ASX200 10 Year Net Total Return series. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance. Brokerage of $3 per trade based on a sample of micro investing platforms.

6. Neglecting your super

Just because you can’t access the money in your superannuation until you meet certain conditions doesn’t mean you should set and forget. It’s important to give your super some attention and check on your fund at least once a year. A good time to do this is when you receive your super statement.

Two of the key things to look at are how your super fund has performed compared to similar funds and whether the fees are reasonable. Let’s look at a hypothetical example of a 30-year-old currently earning $95,581 after tax. If his money was in a super fund with an annual fee of 1% returning 8% a year, at age 67 his nest egg would be worth $749,500.

If his money was in a super fund producing the same 8% annual return but charging a slightly higher fee of 1.5% he’d have $663,300 when he retired – $86,000 less than the first scenario.

Now, if his money was in a super fund returning 7% a year with an annual fee of 1.5% his super balance would be just $537,000 when he hits 67.

Superannuation Retirement Balance Estimates Based on Different Returns and Fees

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Source: www.canstar.com.au. Prepared on 12/02/2024. Scenario begins at the start of the 2023-24 financial year and is based on a 30 year old with a starting balance of $41,689 (per APRA Quarterly Superannuation Industry Publication), starting gross annual income of $95,581 (per ABS Average Weekly Earnings), and retiring at age 67.  SG Contribution amounts per Government announced rates and are assumed to be paid into superannuation fund quarterly.  Employer contributions are assumed to be taxed at 15%.  Annual income is assumed to increase with inflation each year. Inflation is assumed to be 2.5%p.a. due to the rising cost of living (CPI Inflation) plus a further 1.5%p.a. due to the rising community living standards.  End balances at retirement are shown in “today’s dollars”, i.e. they have been adjusted for inflation. End balances at retirement are also rounded to the nearest $100.  Please note all information on income and superannuation performance returns and fees are used for illustration purposes only.  Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account.

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