When it comes to selecting an option, a default option that is already selected for you can make your life a little easier. The default is what you get if you do nothing, if you don’t make a decision to change it. It’s sometimes seen as a recommendation of what you should choose or what most people would choose. Most people do not achieve financial freedom. Most people are not living their best financial life.
While going with the default may make your selection decisions easier, it is not always your best option. We do not advocate leading a financial life by default. Instead, we encourage a financial life by design. There are many financial decisions where choosing the default may not be your best option. So pay attention to these.
Let’s start with a decision that most people face – where to open a savings account. The default option when opening a savings account is to open it where you have your checking account. Banks make this easy and frequently it’s a step in the process of opening a checking account. But, keeping your savings account where you do your checking may not be your best option. While there may be some ease in transferring money, you are likely losing out on interest. The national average interest rate for savings accounts is 0.11% with many banks paying 0.05% or less. However, there are banks who are paying 1.00% or more on savings accounts with no minimum balance requirements or fees. So for every $10,000 you have saved, you could be earning $100 more every year. And it’s likely that when interest rates go up, the interest rates at those banks will stay ahead of the pack.
If you have a 401(k) plan at work, there are three defaults that may not be your best option.
Your auto and homeowner’s insurance coverage usually has a term of 6 months or a year. At the end of that term, you are likely going to be automatically renewed. That’s the default option. But, is it best to renew with your current insurer or shop around for another insurance company? When your insurance is renewed, the insurance company has the opportunity to increase your premium. There are many reasons your premium may go up, and insurance companies don’t all have the same rates. So it pays to shop your insurance coverage, especially if your premiums are going up.
As you can see, accepting the default may not be your best option when it comes to financial matters. We encourage you to take action rather than do nothing and accept the default. Review your options and make an educated decision. The default may be a good choice, but make it YOUR choice and not someone else’s.