Five money traps to avoid at all costs

Mark Bates, a UnitingCare financial counsellor who spoke at The Lady Musgrave Trust 11th Annual Women and Homelessness Forum, calls out five things that we should stop wasting money on.

Funeral insurance

Generally, funeral insurance is the first thing people drop when the going gets tough. Especially as people get older, when we know they’re more likely to be living in poverty, funeral insurance is something they’re likely to cancel. Often, they’ll have been paying into it for several years by the time they cancel it, and then that money is just lost. So if you’re likely to cancel it eventually and get nothing back in return, why invest in funeral insurance in the first place?

If you really want to plan for the future, you’d be better off putting that money into a savings account and having control over it yourself. Then, when you have a dip in your income, you’re not making any more payments but that money is still there for you.

Controversially, perhaps, I would say private health insurance falls into this category for a lot of people, too. Should it really be a priority for you? It’s not necessarily a waste; it’s more that people need to review the appropriateness of it for their own situation. If you’re putting a lot of money into private health, and you’re on a low income, the reality is that your needs will usually be met by Medicare anyway.

For older people on a low income, life insurance is also something to reconsider. Clients will say to me, ‘Oh, it’s going to go to my grandchildren’, and that’s good, that’s their choice – but you have to look after yourself first. You can’t look after the grandkids if you’re not looking after yourself.

Credit repair services

You should never use a credit repair service, because the truth is you can’t repair someone’s credit. It actually can’t be done.

It’s one thing if the default on your credit file is an error. For instance, I had a default from Virgin Mobile, and I’ve never used Virgin Mobile. I was able to get that removed myself because it was put on my file in error. But if I genuinely owed that debt, a credit repair service wouldn’t be able to change it, no matter how much money I paid them.

After all, there’d be no point in having credit files if you could simply buy your way into good credit. You could say, ‘Here’s $5000 I borrowed; now please say I have a fantastic credit history’. It would be an endless cycle.

The reality is that nobody can repair your credit history if there’s a genuine default on there. And if it’s not a genuine default, you can fix it yourself – so why pay someone else to do it?

Rent-to-own appliances

The typical model for a rent-to-own appliance ends up costing people about three times as much as it would if they just bought it outright. So, for instance, if you bought a washing machine for $300, that same washing machine would end up costing you about $900 through a rent-to-own scheme.

If you’re on a low income, you may well be able to access a NILS (No Interest Loans Scheme) loan through a community service. They’ll lend you $300 to buy that washing machine, and it will end up costing you $300, as opposed to $900.

It’s just a very expensive way of acquiring whitegoods.

‘Exclusive’ credit cards and high-interest loans

People who believe in the ‘status’ of their credit cards have always astounded me. Why would you pay significantly more interest just so you can say you’ve got a David Jones American Express card?

I’ll ask clients, ‘Why do you want this credit card?’ And they’ll say, ‘Oh, it makes me feel better about myself’. It just seems a little bit pointless to me.

Similarly, people will happily pay more interest on a credit card from a particular bank, and they’ll say, ‘Oh, I’ve been with this bank since I was at school, and they’ve always been good to me’. The reality, of course, is that they haven’t been ‘good’ to you. They’ve made quite a lot of money out of you. That’s what they’re there to do.

Everything the bank does for you is about money. And when you’re dealing with the bank, it needs to be about money for you, too. You should apply the same standards that they do. It’s not about status, or what bank account you had as a kid, or how you feel about them. It needs to come down to money.

The hardest lender to deter people from using is actually Cash Converters, because most people who have used Cash Converters a lot will have a personal relationship with the person who works at their local store. They’ll say, ‘Cash Converters are great! They always look after me!’

Meanwhile, they’re paying higher fees. But as far as they’re concerned, Cash Converters are great, because they’re meeting a need in their community.

Memberships and apps

Gym memberships are a classic money trap. We all start the new year with great commitment to our personal fitness, and by the middle of February, we find ourselves thinking, ‘One drink and one pie won’t really make any difference now, will it?’

I think most people have a story about joining a gym, going once or twice, and then finding themselves still paying for it two years later. They’re either too embarrassed to go into the gym and cancel it, or they signed a long-term contract – that’s how your money is wasted.

In terms of other memberships and streaming services, it depends on your income, but the less you’ve got, the more every little bit helps. For some people, cancelling their Spotify account won’t change their life. But for someone on a low income, if they’ve got $100 left for the week after they pay the rent, not paying for Spotify will make a big difference.

At the same time, I think it’s important that we don’t deny people on low incomes the simple things the rest of us take for granted. At the end of the day, we live in one of the wealthiest countries in the world. People ought to be able to afford to get a bit of exercise, or drink one beer in a pub on a Friday night. These things shouldn’t ruin anybody’s world, and we shouldn’t be too judgemental.

Smoking is a good example. We all know smoking is very expensive and it’s very bad for you. There’s no debate about either of these things. But if a client comes to me and says, ‘Six months ago I lost my job, and then I became homeless, and my wife left me, and now I’m spending $100 on cigarettes’, I’m not going to say, ‘Well, is it a good time for you to quit smoking?’ Because it’s not. I’ve never been a smoker, but I know that if I was under that sort of stress, that would not be the time to quit smoking.

Life’s tough enough for people – they don’t need moral judgements being made about them as well.

Seek advice from a professional before making any important financial decisions. For more information, call the National Debt Helpline on 1800 007 007.

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