Let's face it. Money is something we all have in common. Whether we are making it, spending it, or saving it, money makes the world go 'round. Since money is the true universal language, today the Rules of Thumb blog from MoneyThumb would like to share with our readers the 10 best pieces of advice about money from an article by Nick Clements of Business Insider. Nick worked in banking for 15 years, and he has the following ten pieces of advice about money:
1. Beware of direct mail.
To win in direct mail, banks don't need to have the best product in the market. Instead, banks just need to have the best product in your mailbox on that day. Whenever you receive an offer in the mail, go online and shop around to ensure you have really been offered the best deal.
2. The best offers are for new customers.
Banking is a constant battle for customers. To win, big sign-on bonuses — like 40,000 bonus miles — are offered. If you are looking for the best deals, you will have to switch to a new product. Those lucrative offers are rarely made available to existing customers. There is a simple reason. Most banks have acquisition teams that are paid based on the number of accounts booked, and they are ready to spend.
3. Be honest with yourself and focus on long-term value.
Statistically, most people will stay with their new product for a long time because it isn't fun to switch financial products every year. Whenever I do the math on a financial product, I choose a product based on long-term value rather than short-term bonus offers. Sign-on bonuses are nice, but they are not the main reason I take out a product.
4. Avoid add-on insurance products.
Finance companies continue to make a lot of money selling insurance products with loans and credit cards. I have seen lending businesses generate 30% or more of their profit by selling credit insurance that covers you in case of death, unemployment, or disability. The sales pitch usually sounds like this: "For less than the cost of a soda a day, you can provide your family with peace of mind." Almost always, these products offer horrible value. Look for a good-term life insurance and long-term disability policy that covers all of your needs.
5. Everyone spends more money on plastic, including you.
Study after study shows that people spend more money when they use plastic, including debit cards. When you carry around a finite pile of cash, you tend to spend less money. And the more plastic you have in your wallet, the more you are likely to spend.
6. Don't scream at the customer service representative.
Being a customer service representative is not an easy job. The workers are not paid high salaries and are often located offshore. They are almost always not to blame for your problem. Yet they get blamed — and screamed at — all day. Being nice to the call-center representative is a better strategy.
7. Really angry with your bank or credit card company? Threaten to close your account.
Call centers work on the basis of "delegated authority." For example, a frontline agent may be able to waive one late fee for an excellent customer. A manager could waive a bit more. The most authority usually often sits with the retention team. And you only get to the retention team by threatening to close your account. You have probably experienced this. You call in and ask to close your account. Your call is then transferred to a specialist. This is a good thing because the big budget usually sits with retention.
8. Just because the bank says you can have it doesn't mean you can afford it.
When banks calculate affordability, they have a simple metric. They want to make sure you can afford to make the monthly payment. Banks do not think about retirement planning, college funds, or other financial needs. You may be shocked when you see how much mortgage you can get, or how big your credit card limit is. That doesn't mean you can afford to use it all, though.
9. If you don't understand it, don't buy it.
You should never be afraid to ask questions that you think are stupid, and you should avoid anything you don't understand. Complexity is the enemy of transparency and is usually the enemy of the consumer. Remember those deep-discount adjustable-rate mortgages? Most consumers didn't understand how much their payment could increase. People have tried to sell me complicated financial products, also known as structured products. I avoid them completely and stick with easy index funds and exchange-traded funds.
10. Understand how the money is made before buying anything.
Arguably, this should be No. 1. Whenever I am being sold a banking product, I think about how the money is being made. Then I pay close attention to whenever I am being asked to do something that will generate earnings for the bank.
For example:
- Savings Accounts: Banks like cheap deposits to fund their loan portfolios, so they want interest rates as low as possible. Internet banks, like Ally, are looking to fund their loan portfolio without the cost of branches. By default, they must have better interest rates because they don't have branches. So I go with a bank like Ally.
- Consumer Debt: Credit-card companies lose money on rewards and make money on interest. Often, the richer the rewards, the higher the interest rate. So if I ever need to borrow money, I avoid credit cards, but I am happy to earn the rewards.
- Stockbrokers: Despite the advertising, they are not financial planners and they make money on trading commissions. It is not a surprise that every time you visit one, you will be encouraged to trade. Don't be afraid to say no.
Nick Clements is the co-founder of MagnifyMoney.com, a price-comparison website that helps people find the lowest interest rate on loans and the best interest rates on savings accounts. You can follow him on Twitter at @npclements.
The team at MoneyThumb really appreciates being able to share Nick Clement's article. We think these 10 pieces of advice about money can help everyone learn how to use our money better and make it work for us. Another way you can make your finances work for you is by considering the time you will save by using our PDF Financial File Converters. Time is money, after all.
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