Getting ahead financially: Household financial waste

Unnecessary and avoidable household financial waste can be costly; placing pressure on your cashflow, locking away potential surplus income, and prolonging the achievement of your financial goals and objectives.

Getting ahead financially: Household financial waste

Unnecessary and avoidable household financial waste can be costly; placing pressure on your cashflow, locking away potential surplus income, and prolonging the achievement of your financial goals and objectives.

 Unnecessary and avoidable household financial waste can be costly; placing pressure on your cashflow, locking away potential surplus income, and prolonging the achievement of your financial goals and objectives.

For example, in our video, ‘Business and household food waste’, we touched on the impact that food waste can have on your household finances; a household’s annual food waste bill is $1,645.64 on average.

Whilst this may not seem like much money to some of us, it’s important to remember this is an expense, which, if left unresolved, can be quite impactful over time – especially when considering opportunity cost.

This unnecessary and avoidable expense (like many others) can be eliminated in full, or at least in part, by taking a proactive approach; recognising and dealing with the relevant issues at hand on an ongoing basis.

Once this expense has been resolved, the resultant surplus income that has been unlocked can then be directed towards beneficial focuses, such as paying down debt or saving and investing for the future.

Household financial waste

According to a recent report*, the collective financial waste of Australian households, when looking at several key areas, totals roughly $18.9 billion per annum. The key areas identified are:

  • food waste ($9.1 billion per annum),
  • home loan waste ($4.2 billion per annum),
  • credit card waste ($621 million per annum),
  • unused gift cards ($332 million per annum),
  • standby energy usage ($1 billion per annum),
  • exception bank fees ($551 million per annum),
  • unused gym memberships ($1.8 billion per annum),
  • unused roadside assistance ($400 million per annum),
  • unused and unreturned clothing ($930 million per annum).

Whilst the above is not a complete list, it does serve to highlight something important.

Food waste is only one area of household financial waste. And, if it exists in a household then rarely does it exist alone; often it can be a part of a much larger aggregation of household financial wastes.

Home loan waste

When looking at the second biggest household financial waste, home loan waste, the $4.2 billion per annum relates to unnecessary home loan interest paid by existing borrowers. What is meant by unnecessary interest?

Here is a summarised excerpt (and supporting table) from a recent report^ by the Australian Competition & Consumer Commission (ACCC), which relates to standard variable rate residential mortgages:

Lenders appear to be offering significant discounts to new customers with the result that new borrowers are paying lower interest rates on average than existing borrowers at the same lender. It suggests that many existing borrowers might achieve significant savings by regularly reviewing the interest rates they are paying, asking their lender for a better rate, switching to a cheaper product at the same lender or switching lenders to take up the best available offers.

 
The difference in average Inquiry Bank# interest rates for

existing and new standard*^ variable rate residential mortgages: 30 June 2018

Borrower
Loan CategoryExisting borrowerNew borrowerInterest rate difference
Owner-occupier
Principal and interest repayments4.13% interest rate3.89% interest rate0.24 basis points
Interest-only repayments4.62% interest rate4.49% interest rate0.13 basis points
Investor
Principal and interest repayments4.73% interest rate4.41% interest rate0.32 basis points
Interest-only repayments5.10% interest rate4.87% interest rate0.23 basis points

#The big five banks (ANZ, Commonwealth Bank, Macquarie Bank, NAB and Westpac).

*^Standard residential mortgage products are those supplied with a range of add-on features, such as an offset account.

Interestingly, as part of the same report, a survey asked existing borrowers the following question, “If you saw a lower mortgage rate at another institution, at what point would you consider switching your mortgage?

Here are the findings from the survey:

  • Nearly one-third of existing borrowers surveyed said they would not consider switching unless they were offered an interest rate at least 60 basis points lower than their current one.
  • Another third of existing borrowers surveyed said they would switch for an interest rate between one basis point and 59 basis points lower than their current one.
  • The remaining existing borrowers surveyed said they would not switch based purely on interest rates.

Coupled with these findings are the following statistics:

  • 53% of existing borrowers don’t know their current interest rate.
  • 59% of existing borrowers have never asked for a better rate.
  • 78% of existing borrowers have never had a conversation about paying off their home loan faster’*.

Given above, here is a simplistic example regarding standard variable rate owner-occupier residential mortgages with principal and interest repayments – and, an existing borrower (as per the ACCC excerpt):

  • Asking their lender for a better rate;
  • Switching to a cheaper product at the same lender; or
  • Switching lenders to take up the best available offers’.

 

 
Household financial waste: Home loan waste (unnecessary home loan interest) example
Scenarios
Loan termsNo changeChange & minimum repaymentChange & higher repayment
Standard variable rate owner-occupier residential mortgage with principal and interest repayments
Loan: Existing loan

Loan amount: $413,834

Interest rate: 4.13%

Loan term: 30 years

Repayment frequency: Weekly

Repayment: $462.81 p/wk

Total interest: $308,149

Repayment: $449.60 p/wk

Total interest: $287,544

Total saving: $20,604

Repayment: $462.81 p/wk

Total interest: $270,280

Total saving: $37,868

Time saved: 1 yr, 6 mths

Loan: New loan

Loan amount: $413,834

Interest rate: 3.89%

Loan term: 30 years

Repayment frequency: Weekly

 

Moving forward

Getting ahead financially can involve an analysis of your existing financial situation; seeing if adjustments are required in one or more areas – especially regarding unnecessary and avoidable household financial waste.

As reiterated above, household financial waste can be costly; placing pressure on your cashflow, locking away potential surplus income, and prolonging the achievement of your financial goals and objectives.

However, household financial waste can be eliminated in full, or at least in part, by taking a proactive approach; recognising and dealing with the relevant issues on an ongoing basis (these things aren’t ‘set and forget’).

Over the festive season, consider setting aside some time to do a stocktake of any unnecessary and avoidable household financial waste that may presently exist. The list above may be a good start, but isn’t a complete list.

If you have any questions regarding this article, please do not hesitate to contact us.

https://www.shartruwealth.com.au/

14 Macquarie Street, Belmont, NSW 2280

PO Box 565 Belmont NSW 2280

1300 478 424

advice@shartru.com.au

https://www.shartruwealth.com.au/blog/getting-ahead-financially-household-financial-waste/

DISCLAIMER
Any information provided on this website is general advice only and does not take into account the investors’ objectives, financial situation or needs. Before acting on this general advice, investors should, therefore, consider the appropriateness of the advice having regard to their objectives, financial situation or needs.

About the author

Shartru Wealth Management is a full-service financial services dealer group established to provide operating freedom to financial advisers through outstanding support and financial services to individuals and families through intelligent advice. The members of our management team each bear the scars ... more