Mistake #1 Forgetting about offset accounts
According to the 2018 Gateway Mortgage Holders Sentiment Report, 53% of home-loan holders are aware of what an offset account is, but that means almost half of all home-loan holders are aware of, or are maximising, the benefits of an offset account.
“Offset accounts are typically transactional accounts that are linked to your home loan. As the name suggest, the balance is offset against an equivalent potion of your remaining home loan. For example, if you have a $300,000 home loan and a credit balance of $30,000 in your 100% offset account, you will only pay interest on a home loan balance of $270,000,” says Lexi.
“If you’re considering an offset account, be sure to understand the terms and conditions of the products you’re comparing, as some accounts may only offset a proportion of the balance in your account against your home loan.”
Mistake #2 Dipping into savings
Lexi explains that dipping into your savings to buy everyday items is a mistake that will see your savings dwindle, rather than grow.
“Consider separating your savings goals into different ‘jars’ and naming each account by its purpose. By doing this, rather than putting your extra cash into just one account, you might be surprised to see your savings grow faster. The simple act of naming and compartmentalising your separate savings accounts will remind you that every time you dip into an account, you’re not just drawing down on savings, but also taking funds away from that big end-of-year holiday or the new car you’re saving up for. Visual reminders, even if it’s just the name of your savings account, will help keep you motivated to be disciplined to reach your goals sooner. As an additional measure, you might even want to look at stashing your ‘jam-jars’ away into a savings product that offers restricted access,” says Lexi.
Mistake #3 Not recognising the benefits and risks of compound interest
“Compound interest is an oft-forgotten secret for cleverly building up savings without lifting a finger. Unlike simple interest accounts, savings accounts that offer compounding interest will enable you to earn interest on interest. To break it down further, you’ll earn interest on the amount that you initially deposit (also called your ‘principal’), as well as the interest accrued. There are many financial institutions in the market that offer a variety of products with compounding interest including savings accounts, online savers, bonds, term deposits and superannuation accounts,” says Lexi.
“On the other end of the spectrum, the benefits of compound interest on your savings can be detrimental to your finances when we’re looking at credit cards or other loan products. In the same way that compound interest can grow your savings at a more rapid pace than simple interest products, it can also grow the size of your loan balance, or debt at a more rapid pace.”
Mistake #4 Shopping with buy-now-pay-later schemes
“Buy-now-pay-later schemes are trending, particularly for younger demographics. Although they are technically interest-free, you could end up paying more than you’ve bargained for in monthly fees or late charges if your account isn’t paid off on time,” says Lexi. “The buy-now-pay-later options also normalise debt, which is not ideal if you’re looking to grow your wealth. While some debts, like education or home loans, are considered ‘good debts’ because they are an investment in your future, getting into a debt-cycle for the sake of non-essential luxuries could be detrimental to the long-term health of your personal finances.”
Mistake #5 Tax offsets and concessions
“The government implements a number of tax offsets and concessions, the most obvious of which is the tax-free threshold on voluntary super contributions. To encourage Aussies to be more proactive about their retirement funds, concessional super contributions are tax free up to $25,000 per financial year,” says Lexi.
“On top of this, if your spouse or partner earns $40,000 or less per annum, and you contribute to their super, you could be eligible for a tax offset of up to $540. Finally, for Australians over who earn over $90,000 per annum, taking out private hospital cover can reduce your Medicare levy surcharge obligations. Additionally, if you decide to take out private health insurance cover before your 31st birthday, you’ll also avoid the 2% Lifetime Health Cover loading. This loading applies to consumers who take out private hospital cover after they turn 31. This loading increases by 2% each year to a maximum of 70%, which could make a huge difference on what you pay for your premiums in the long run.”
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