Why financial loyalty can be bad for the back pocket

  • 12/10/2021
Chris Walsh, founder of Moneyhub says sticking with the same provider without comparing prices can hold people back financially.
Chris Walsh, founder of Moneyhub says sticking with the same provider without comparing prices can hold people back financially. Photo credit: Supplied/GettyImages.

OPINION: Loyalty is a good thing - but when it comes to managing money, it's important to be open to comparing prices, and to be prepared to switch companies for a better deal.

Chris Walsh, founder of personal finance website Moneyhub says there are many examples where money is wasted on seemingly obvious traps.

Returns on savings accounts versus interest charges on credit cards is one example.

According to Walsh, one of the biggest things holding people back financially is reluctance to change their behaviour.

Here are four situations where inertia can lead to overspending - and how people can regain control of their financial situation. 

Why financial loyalty can be bad for the back pocket.

1. Paying credit card interest rates with an unaffordable credit limit

Credit cards are fantastic for some people - and a disaster for others. 

If you struggle with money, a credit card is a flame to petrol. 

Lowering the credit limit is a smart starting point. For example, if your limit is $5000, consider reducing it to $1000. 

Credit card creep happens when there's a soft limit that is easy to increase. Sooner or later, a situation where wages don't cover the balance owed becomes a long-term reality. 

Dragging an $8000 balance costs around $1600 a year in interest (around 2000 pre-tax). This means around $170 of your monthly wages are burned up just by paying the interest. 

I always argue that the best credit card for someone struggling to keep afloat is no credit card at all. While this may seem obvious, banks and long-orientated credit card issuers don't share my view. Instead, they are known to approve applications liberally. This keeps tens of thousands of New Zealanders in perpetual debt. The only winner is the bank. 

What can you do?

Aside from dropping the limit, another option is to apply for a balance transfer credit card with a lower interest rate and prioritise paying it off. 

As the balance is repaid, dropping the limit prevents the card from being used for everyday purchases.  

The best outcome is to cancel all credit cards and live a life where money is earned and spent - not the other way around. 

2. Rolling over insurance policies

Too many people renew their insurance policies year after year without comparing prices.

In the last few years, insurance has moved a long way: earthquakes and flooding have forced insurers to base their price on specific risks. Some types of insurance, such as car insurance, use more data points to estimate risks based on behaviours.

Insurers profit from 'set and forget' policyholders who renew annually and don't ask too many questions. 

However, it's your responsibility to challenge the status quo and look for a better deal. A simple re quote on car, home and contents insurance could save you hundreds of dollars per year.

Life and other insurances requiring health information may not be in your best interests to change. A financial adviser or broker can help with pricing options.

What can you do?

Make an effort to compare, even if it's only a couple of other options. Talk to your insurer about multi-product discounts and also see whether discounts apply for paying annually.

3. Buying everyday items in small quantities 

Think about the items you use regularly. Rather than buying each time you run out, check whether there's a price option that matches your usage.

Examples are prepackaged groceries (where bulk is cheaper per gram than convenience-sized options), top-up mobile data (where monthly plans offer generous data packs) and everyday expenses that are cheaper when bought in bulk.

What can you do?

Look at your bank statements: do you see small transactions with the same name repeating? 

For example, an all-inclusive monthly SIM-only plan is probably cheaper (and much more convenient) than three data top-ups.

4. No rainy day fund

A rainy day fund is a financial backstop and prevents having to run to predatory lenders if money is needed urgently.

What can you do?

Start saving - start small! 

Some people may feel they don't need a backup fund.  But no one regrets the feeling of saving and the freedom that comes with even $500 or $1000 tucked away for emergencies.

It's too easy to turn on the spending tap and get comfortable with the routine. 

Small changes are the best way to help save money, while barely changing your lifestyle. 

Chris Walsh is the founder of the financial resource website moneyhub.co.nz. The ideas discussed in this article are for informational purposes only and are not personal advice.