A silver lining in the midst of rate cuts: financial awareness



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Following the recent Reserve Bank of Australia (RBA) cuts to the cash rate – taking it to a record low of 1.00 per cent – the financial industry has been under intense media scrutiny.

Whilst some worry this has damaged overall consumer confidence, a more optimistic view brings to light a silver lining:

Financial awareness

The complexities of the industry can cause many a furrowed brow, with confusion often lying in the translation of acronyms known only to the financially literate.

When you take a moment to unravel the intricacies of finance, however, you will find yourself feeling more empowered than ever before.

With the RBA cutting the cash rate to the lowest in Australian history, now is a better time than ever to start looking deeper into your finances.

RBA cash rate changes over time

Data Accurate as of 25th July 2019

How do you achieve financial awareness?

#1 Be honest about your spending

Are you a disciplined spender that can manage their money easily, saving a little every week for a rainy day?

Or, are you more spontaneous with your spending, jumping at every opportunity to buy something new? Being transparent about how you spend money is crucial, as it impacts the financial products you apply for.

Let’s say for instance that Belinda & Isabelle are travelling to Fiji and are both looking to apply for a credit card to use whilst overseas that charges no foreign transaction fees.

Belinda has always been a diligent saver and has always had savings over $5,000 since she was 20-years old. Isabelle has always spent frivolously and has never had more than $500 in her account at any one time. They are both on a salary of $50,000/year and do not have any current debts.

Whilst they may both be approved for a credit card, Isabella could be more likely to incur additional fees as she is frivolous with her spending. This could cause some post travel depression when she sees the debt she has accumulated on her holiday.

The key with managing your finances is to be honest with yourself. If you cannot control your spending, think carefully before you sign on the dotted line.

#2 Bookmark financial tools that help you do the math

Financial decisions and comparisons can often involve complicated maths equations. Luckily, in this digital age, there are multiple free tools and resources that you can use online to do the math for you.

In the market for a new car? The RateCity car loan calculator can help you compare car loans without the complicated calculations. When you have a few car loans that you want to compare, just input the loan amount, interest rate, loan term and repayment frequency.

The calculator will then show you your estimated weekly repayments, total interest paid, total amount to pay, as well as showing you various loans from lenders in an easy to compare table below.

car loan calculator

Source: RateCity Calculator

Similarly, if you’re looking to buy a house, the Australian Securities & Investments Commission (ASIC)’s Mortgage Calculator is an easy to use tool with graphs that help you visualise your repayments. Rather than staring blankly at the screen trying to make sense of percentages and fees, this calculator simplifies the entire process.

When you have a few home loans you would like to compare, simply input the loan amount, interest rate, repayment frequency, length of the loan and account keeping fees into the calculator. ASIC will then show you a graph similar to that below, so you can visualise the repayments and see the amount of interest you will be paying over the length of your loan.

ASIC mortgage calculator

Source: ASIC Mortgage Calculator

Thankfully, there are a number of financial calculators online that you can use for free to compare financial products and make an informed decision on which is best for you.

#3 Take time to review key documents

Man worried about his financial situation reading the PDS

The Australian financial market can be confusing, especially when it comes to determining what lenders do, and how they differ. With a plethora of information to read on various financial products, comparing lenders may seem out of reach for the everyday Australian.

Different fees, conditions and interest rates can be charged depending on the financial product in question, as well as the lender’s evaluation of financial risk. The advertised rate you see on the lender’s website, for example, may not be the rate you are offered.

Affordability tests that analyse a borrower’s income, credit history and assets can lead to the development of what is known as a “personalised rate.” This means lenders can change the rates to match the financial risk they believe they are taking by loaning you the money.

In a similar fashion to the mindless acceptance of terms and conditions for various products online, many consumers do not carefully read the fine print when borrowing money.

As a consumer, make sure you always look at the Product Disclosure Statement (PDS) and the Key Facts Sheet to see any hidden fees, before signing on the dotted line.

Things to watch out for:

• Different lenders offer a variety of financial products, each with their own associated fees and interest rates, and the most competitive option is defined entirely by your financial situation.
• Finance is not a one size fits all model. With every lender having different terms, conditions and interest rates, you must do your research before committing.
• Fees and charges that apply to financial products may not be displayed on the main page where the product is advertised. Make sure that you download the PDS and Key Facts Sheet and research all associated fees and charges before you sign anything.

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