Dollar cost averaging
Banks are like supermarkets. Write a list before you go shopping.
For some reason, most people still consider bank staff to be pillars of respectability who always act with the utmost regard for their client’s best interests. We blame the movie Mary Poppins. In truth, these days banks are little more than financial supermarkets: they pretty much all sell the same thing, with slight variations in pricing and packaging, and they work best when customers decide what they want before they go shopping. Don’t ask the bank what sort of loan you need. When was the last time you asked the checkout chick at your local Woolworths what you should buy for dinner?
And remember: your bank manager is probably getting a commission on your loan.
Consider an adviser who was talking to her client about re-negotiating a NAB home loan. The clients were paying 5.2% interest, while the adviser knew other clients in similar circumstances who were paying only 4.8%. The difference of 0.4% might not sound like much, but it is significant. $500,000 times 0.4% is $2,000 a year. And at a 40% tax rate the client has to earn $3,333 in salary to pay the extra $2,000.
So, the adviser suggests that the client simply e-mail their bank manager asking for same interest rate as the NAB’s other customers. This was not a credit recommendation and so it was a relatively simple thing for an adviser to recommend (unlike other parts of our service where everything needs to be communicated in a formal written statement). The adviser was simply stating a fact: other clients were paying a lower interest rate to the same lender. The client then liaised directly with the bank.
The email took less than ten minutes to write and send and, what do you know, it worked. The bank read between their customer’s lines (that it would probably be worth refinancing somewhere else to save $2,000 in interest every year), and made the move quickly and painlessly. The effect was the same as the client receiving a $3,333 pa salary increase. Over the next ten years – and whose mortgage is less than ten years? – the amount saved will compound to more than $24,000 cash saved.
The client’s problem had been to assume that the bank was giving her the best interest rate possible. In a sense it was – but it was the best interest rate for the bank, not the customer. Imagine if you asked the ‘check out’ operator what you should have for dinner – and he was going to be paid a percentage of whatever you spent. Probably won’t be recommending Home Brand, will he?
