5 massive myths people have about money

5 massive myths people have about money

While there’s a great deal of value to be found in traditional wisdom around money and finances, at least some of the advice that gets passed down contains more myth than reality.  

Here are five popular money myths that may surprise you:

Myth 1 – All debt is bad debt

While it’s true that out of control debts can cause real problems for a household’s finances, a certain amount of carefully-managed debt can help a borrower reach their financial goals much more quickly and easily, ultimately providing enough value and benefits to justify their costs.

It’s not a hard-and-fast rule, but good debt can be broadly defined as borrowing money to pay for an asset that’s going to add value or provide future benefits (e.g. a home loan or business loan), whereas bad debt involves borrowing money to cover the cost of something that won’t offer the same kind of long-term value (e.g. using a credit card to pay for impulse purchases). Use your best judgment.

Myth 2 – Credit card rewards are worth the higher fees

Many of us love credit card points, as they reward us for doing something we already enjoy, namely shopping. However, the price we often have to pay for these credit card rewards are higher fees on our Gold, Platinum or premium credit cards.

When you crunch the numbers around some credit card reward programs, the amount you pay in fees is often much more than the value of the reward points you can realistically expect to earn on your regular spending. Using one of these cards to earn rewards could mean effectively losing money. 

Plus, ever since new interchange fee regulations for credit cards came into effect in July 2017, more and more credit cards are cutting their reward point programs, making it much more difficult to maximise your points earned per dollar spent.

Myth 3 – A penny saved is a penny earned

While saving your money is more responsible than recklessly spending it, your cash won’t do you much good sitting in your transaction account, stuffed under your mattress or buried on a desert island. Instead, it may be worth considering putting your money to work.

Carefully investing your money in property or shares can allow you to grow your wealth, though there is always some risk involved. Another option is to keep your money in a dedicated savings account, which will allow you to earn some interest on your savings while keeping it relatively secure.

Myth 4 – Loyalty matters

It may sound cynical, but it doesn’t always pay to be loyal to your bank. Even if you’ve banked with the one institution all your life, ever since you were a kid, that’s no guarantee they’ll offer you the most affordable financial products, or deals that are suited to your personal finances.

Switching financial products, whether it’s a home loan refinance or a credit card balance transfer, is often much simpler than you’d expect, and other lenders may be in a position to offer more affordable terms and conditions that better fit for your household finances.

Myth 5 – Only rich people need financial advice

No matter how wealthy you are, managing your own money can be a rewarding experience, in more ways than one. But while there’s plenty of general financial advice available out there to guide your decisions, there are limits to how much this advice will likely apply to your household’s unique financial circumstances.

If you’re uncertain about any financial decision, large or small, it’s often worthwhile to seek expert advice from a qualified finance professional or broker. As well as offering industry knowledge and experience, a financial adviser can look at your household budget and recommend financial solutions specifically to help you reach your goals.

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Learn more about savings accounts

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

Do banks run credit checks on savings accounts?

When you apply to open a new savings account, some providers may conduct a credit check, meaning that they will ask a credit bureau for your credit history. This isn’t always the case on savings accounts though and depends on the provider, as you aren’t borrowing money. 

As you are opening a savings account and not borrowing funds, this credit check is considered a soft inquiry and should not affect your credit score. If the bank has run the credit check, you can often still open a savings account even if you have a poor score, provided you meet other requirements. 

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.