Helpful or Harmful? Know your figures then use the magic!

Let’s start with the good news, Shell petrol discounts provided by Coles dockets have almost doubled in value, even though they remain at 4c per litre.

4c per litre when fuel is $1.50 per litre is approximately a 2.67% discount, when fuel is $0.80 per litre the discount is now 5%.  Sounds great right?

Now what about the big banks?  They are being very helpful right now, aren’t they?

Banks are offering all kinds of “assistance” with your home loans and credit cards right now.

CBA sent an email very kindly telling customers that if they were ahead on their payments or paying more than the minimum, they could reduce their repayments.  That is helpful, even though most people know that.

Then a short time later they sent another one saying “we’ll be automatically reducing eligible home loan direct debit repayment amounts to the current minimum”.  NOT you can, or if you would like to opt in – “WE’LL BE AUTOMATICALLY……”

So, in order to maintain your existing position, you must actually use your time and energy to take action.

There is magic in the financial world, hiding under the boring name of “compound interest”.  Consumers are having to make difficult choices about which magic to use, good magic or bad magic, and when there is so much to cope with, this is a confusing burden.

As you have no doubt heard already, taking funds out of super is reducing the power available from good magic, by this seemingly small amount ($10,000) reducing some people’s retirement savings by over $100,000.

In a similar way, we are empowering bad magic by not paying every cent possible off your credit card and to a lesser extent right now due to low interest rates, your home loan.

The power of paying extra off debt has been promoted by financial wizards (financial planners, accountants, financial counsellors et al) for many years.  However it works in reverse when the banks are charging extremely high interest rates on credit cards.  NAB is charging 19.99% pa on some credit card options right now, and whilst the cash rate has fallen drastically to 0.25% pa, credit card interest rates have mostly remained unchanged.

The NAB have reduced their monthly minimum payment on credit card debt to 0.5% of the balance.  So, the remaining amount of interest that you don’t pay is accruing compound interest and working against you, building a higher and higher debt.

For example, on a balance of around $15,000 at 19.99% pa paying only 2% of the balance will take approximately 67 years and cost approximately $67,000 in interest.  Increasing the amount paid to 5% will save around 65 years and around $63,000 in interest.  But the new minimum could result in paying interest of more than $660,605,000 in interest and take more than 83 years to pay off (if ever).

The issue here is that the banks fully understand human behaviour and are relying on inertia and the lack of financial literacy of consumers to help recover their losses in other areas including remediation costs for financial advice failures.

People are busy, their inboxes are full, they think they have a solution to avoiding late fees by paying the minimum amount as a pre-set amount.  Then the bank changes the automatic minimum amount without their input.

This inertia strategy is also used by the banks to pay minimum interest on their term deposits.

Of course, people can pay more on their credit cards, however many won’t notice it, many won’t change it, and many don’t understand just how wicked this is.

Personally, I would rather get a job in the coal mines or sell a kidney than pay less than the usual minimum payment if I had a credit card debt.

If the bank wants to “Help in any way they can” as stated on their email, they could be reducing interest rates or fees on credit, changing consumers to the lowest rate cards available if they carry a balance, or refer people to financial counsellors if they can’t pay their standard minimum payments.

Many consumers are furious they now must take action to get back to the payment amounts they personally set.  Giving people options to reduce payments in certain circumstances is very helpful and deserves recognition.

What they are doing now though deserves a different kind of recognition.

How do you know where to prioritise your payments when times are tough and things are so confusing?  You might need help (financial counsellor) or advice (financial planner).

Use the power of compound interest to your advantage and it is like waving a magic wand.

Melinda Houghton

Adv. Dip FS (FP)

Insider Out – Understand and Trust your Advice

 This information may be regarded as general.  That is, your personal objectives, needs or financial situations were not taken into account when preparing this information.  Accordingly, you should consider the appropriateness of any information we have given you, having regard to your own objectives, financial situation and needs before acting on it.

I am no longer authorised to provide financial advice.  If you wish to receive financial advice you must contact an authorised provider.

https://www.moneysmart.gov.au/investing/financial-advice/financial-advisers-register

 

 

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