Time to read : 5 Minutes
Lately… “Should I invest in crypto?” is one of the most common questions my money-educator-self gets asked. Closely followed by this one: “What is the biggest money mistake I can make?” And that – in my opinion – is a great question. One that can have a real impact on your financial bottom line.
Everyone knows the little – that can get large – ones like spending more than you earn, not putting a bit aside for the future and buying cinema snacks.
But in my now-25-year career as a personal finance expert I have seen Aussies make the same five huge money missteps – over and over again.
The thing is that these seem sensible, but in fact they diminish your financial advantage.
So, for my new magazine, Money Secrets, I decided to calculate just how much the five most common financial failings can cost… so you can see the potential damage to finances.
Let’s count down the five gaping strategy pitfalls, from those that do the smallest to the largest damage.
A quick note: unless specified, all my calculations are based on a $659,922 mortgage at a 6% interest rate which is roughly the average rate today. Why $659,922? According to data from the ABS, that's the average amount currently being borrowed in Australia.
Money Mistake #5: Holding savings in the bank instead of the mortgage
Even if you have a high interest savings account while you have a mortgage, not housing your savings against your mortgage is a flawed approach for two reasons.
The average mortgage interest rate is usually 1 percentage point higher than the average savings rate (and that’s the savings rate assuming you qualify for the top tier each month, which usually has some obstacles).
When you earn interest from a savings account, you pay tax on it. By contrast, you earn real benefits when you keep extra money against a mortgage. And yes – this is tax-free.
But let’s see the bottom-line.
Your loss from holding $20,000 in a savings account: $46,961.
Using a mortgage calculator, over a 25-year period, a higher rate taxpayer would keep only $18,166 of their interest after tax (a gross $34,275) from holding $20,000 in a savings account earning 5%.
Instead, they could save $65,127 on their home loan.
But here’s a vital safety note, which highlights one of the biggest mistakes I see people make: paying money directly into your home loan. Instead, keep it in an offset account alongside the loan.
Money held directly in the loan may not be available for redraw and can even be locked up by your lender if you get into financial trouble. Yes, this can help you pay down the loan, but only an offset can give flexibility if you need to access your money.
Note: not all home loans have an offset option. Talk to your broker to find out more.
Money Mistake #4: Keeping an old-school credit card with the average debt
An old-school credit card could be charging you up to 18% interest.
Times have been tight and it’s possible you now carry over a credit card debt, where you could previously clear it each month.
But there is another way. And it’s with a credit card with better conditions.
Your loss from a $5,000 credit card debt: $7,472.
This is how much you would pay on a $5,000 credit card debt even if you accelerated repayments so that it was gone in five years.
But if you make only the minimum required repayments, you would end up paying $17,862 in interest… over nearly 35 years.
So, if you really need a credit card, the far smarter move is to take up a 0% balance-transfer credit card. These allow you to switch your debt from that high rate to be entirely interest-free – with a new institution – for a period of up to 26 months.
And that gives you a window of opportunity to repay it once and for all, with nothing going to the provider and every dollar coming off your debt.
Money Mistake #3: Buying anything with your own money… at least at first.
Falling into what I call my win-spired strategy category, I use a credit card with a 55-day interest-free period for all my monthly costs, so I can sit my salary against my mortgage for the whole month (and yes, in an offset account).
If you think about that, that’s really using the bank’s money for free.
And you may never have considered that this could save you tens of thousands of dollars in home-loan interest…
Your loss from using your own money: $33,624 in excess mortgage interest.
This figure is based on sitting $10,000 a month of your household’s salaries/credit card balance in an offset account against your home loan. (And you’ll get mortgage-free one year early.)
Be aware: you must clear your credit card balance in full each month so you really do use your card provider’s money free.
Money Mistake #2: Purchasing anything without cashback
These services have joined rewards points as my latest financial obsession.
They are simply third-party platforms that connect companies with customers – a bit like Uber.
The difference is that the companies pay for that connection and return some of your spend to the cashback platform, which then passes a chunk back to you.
Your loss from not using a cashback service: it can vary, but I’ve made more than $2,400 from just two years of regular purchases through a cashback app.
💡You can earn particularly good rebates on higher value purchases – and holiday accommodation works very well.
Money Mistake #1: Sticking with an average or overpriced mortgage rate.
Just. So. Expensive.
The difference between the average and best home loan is more than 1%. Doesn’t sound like much? But based on moving from the typical 6% rate to a more competitive rate of 5%…
Your loss on a $659,922 mortgage: $118,215 in overpaid interest. Yes, $118,215.
Bottom line
Drum roll please… that brings your total potential loss from the most common money mistakes – or your gain from using smarter strategies to: $208,672.
Why would you instead leave that on the table?
And if you want to know: should you invest in crypto? All I’ll say… only with money you can afford to lose.
Breakdown of what money mistakes could cost
Mistake #5: Holding savings in the bank account instead of the mortgage
Loss: $46,961
Mistake #4: Keeping an old-school credit card with the average debt
Loss: $7,472
Mistake #3: Buying things with your own money instead of using the bank’s money for free
Loss: $33,624
Mistake #2: Purchasing anything without cashback
Loss: $2,400 … every two years!
Mistake #1: Sticking with an average, overpriced mortgage
Loss: $118,215
TOTAL: $208,672
Go deeper:
Here’s how to set yourself up for a bigger tax refund... yes it's above-board
The hacks and apps I use to take my family on holidays for less money
Nicole Pedersen-McKinnon has condensed her tried-and-tested wealth-building strategies from 25 years as a personal finance educator into her new magazine Money Secrets – from Worry to Wealthy. You can buy it online or from supermarkets and newsagents.
Financial Disclaimer:
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
