Don’t Default On Your Financial Decisions

January 11, 2017
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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.

Your Savings Account

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.

Your 401(k) Plan

If you have a 401(k) plan at work, there are three defaults that may not be your best option.

  1. Participation and Contribution Rate – The default option with many 401(k) plans is that you don’t participate unless you elect to. You save nothing in the 401(k) plan. Some employers have started defaulting to enrolling new employees at a 3% contribution rate. But is either of these defaults your best option? Probably not. Besides the fact that you’re not using the plan to your advantage for retirement savings, you may be losing out on employer matching contributions. Many employers match employee contributions usually at a rate of 50% of your contributions up to the first 6%. If you earn $100,000, that’s $3,000 you are leaving on the table every year by not contributing to the plan.
  2. Investment Choices – Many 401(k) plans now default your investment option to a target date mutual fund if you do not choose your own funds from the available options. A target date mutual fund is a single fund that allocates your investment dollars based on a specified year in the future (usually timed with your expected retirement date). While going with this default makes your investment decision easier, is it the right decision for you? Consider that there may be other fund choices in the plan that have lower expense ratios which means more money in your pocket (Read our article on these hidden investment fees). Also consider that target date funds lump you together as an investor with everyone else your age, but they do not consider your individual investing needs or risk tolerance.
  3. Leaving the company – The third place where the default may be disadvantageous for your 401(k) is when you leave the company. While the 401(k) plan offered some benefits in the form of saving for retirement and possible matching contributions while you were employed, once you terminate employment with the company, you can no longer save money to the 401(k) plan. The default for most 401(k) plans is that your money stays in the 401(k) plan account. But is this your best option? Moving the money to a different 401(k) plan, IRA, or other retirement account may be beneficial if there are better investment options in the other account. Consider the diversification of the investment options and the costs of investing. Your old employer’s 401(k) plan may have high investment costs in terms of expense ratios and administrative fees, and you might be better off moving your funds elsewhere.

Insurance Coverage

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.