Pay close attention to the downside
Inez Dyer
Province
EDMONTON — As I see it, your financial success or failure is all about numbers. Every time you make a financial decision, you have to pay close attention to the numbers and understand their potential upside or downside.
Unfortunately, selling at any cost appears to be the mantra of most financial-services representatives, and as a result people are watching their net worth slowly being eroded by fees, interest charges and payments that don’t work in one’s favour.
Here are numbers of which to be careful:
– Credit-card debt. If you have $17,000 owing on an 18-per-cent credit card and choose to make minimum payments, it will take you 65 years to pay off that debt.
– If you invest $100,000 in a mutual fund with a management expense ratio of 2.87 per cent, in 10 years you will pay $28,700 in fees. Add to this a couple of years when the fund may dip 10 per cent in value and you could wind up seeing 45 per cent to 50 per cent of your original investment evaporate.
– If you withdraw money just five times a month at a white-label or generic instant-teller machine, it will cost you anywhere from $15 to $25 in additional service charges every month.
– If you have a $150,000 mortgage at six per cent and make monthly payments over 25 years, that mortgage will cost you $287,912. If you change to a weekly payment, it will cost you $262,088, a savings of $25,824 in interest.
– Be careful when someone offers you, or especially your children, one of those $24.95/$29.95 monthly cellphone packages.
You’ll not only have to sign an airtight two-or three-year contract, but there are additional charges for virtually every function on these phones. Even the most careful users find it next to impossible not to incur additional monthly charges.
– Pay particularly close attention to load fee schedules before purchasing mutual funds. You could easily wind up paying a withdrawal fee up to seven years after making the original investment. I thought hostage-taking was illegal.
– Before you invest in a market-linked GIC, know the restrictions on your possible returns. Most of these GICs pay only a percentage of the total returns of the underlying market they are linked to. Ask before you sign.
– Before you take money out of an RRSP, consider your total income. While your bank may withhold only 10 per cent in taxes if the redemption is under $5,000, it will likely wind up costing you much more if your yearly income is in a higher tax bracket.
– If you’re an active stock trader, shop the market before opening a trading account. There is a huge selection of choices and fee structures. Read the fine print carefully to determine whether the trading fees are a come-on or the real deal. Also, ask about what it will cost to get your money in and out of your bank account.
– When leaving a company, carefully explore all your options prior to moving your pension into a Locked In Retirement Account. In most provinces there are tight restrictions on the amounts you can withdraw from a LIRA.
What looks like a huge pool of money may provide only minimal income, especially in the earlier years.
– If your company has a share-purchase program, take advantage of the benefit, but ensure you have the right to sell off some shares from time to time. Enron employees know about the perils of having all their financial eggs in one basket.
– Service charges. Go for the no-frills package at your peril. What looks inexpensive may wind up costing you the most.
If you pay for everything with your debit card, choose a fee package that allows unlimited self-
service transactions for one flat monthly charge.
In order to be financially savvy you not only have to know how to make money but also how to manage your costs and risk.
Remember, no one cares as much about your money as you. Use this motto — it’s a freebie with no strings or fees attached.
