December 12, 2019

12-Minute Financial Makeover Step 1 - Promise to Combat Chronic Strain of Fees

Welcome to our 12-Minute Financial Makeover Series. This is the first installment of our usual twelve. If you commit to it, this series could be a great way to get your financial affairs in order.

Because of its personal nature, we don’t believe in easy one-size-fits-all financial solutions. General principles will always apply but you will have to adapt them and decide what to implement in your family’s unique situation. So, don’t expect things to fall straight into your lap.

In that regard, we will propose some homework at the end of every post of the series. Our intentions are to only provide guidelines and clues on what you could work on and think about for each theme. You should have plenty of time to accomplish what suggested between each article. We even think each step could be achieved within a week. In that sense, if you discover our series after its original publication at the end of 2019, we recommend one stage a week to get you through the whole financial cleansing process within 12 weeks.

So, let’s immediately get to our first enlightening subject!

One Simple Financial Truth to Teach Our Children

To tell you the truth, fees were not our intended original subject. But it all changed after we let our teenage daughter have her first few experiences with money. Let’s just say she already has had a few run-ins with some intricacies of our financial system. Let’s now tell you about some of it.

For her 12th birthday, she received from a friend, a 25$ cash gift card that initially seemed quite nice. But we were surprised when we realized it cost 2$ just to activate the card. We were even more astonished about the 1$ monthly fee to keep the card. Let’s just say she quickly got rid of that insane-fees card.

A few months after that, a school trip was her first chance to use her brand-new bank card. Our local bank rep had told us it would work fine to shop in the US. But after the card was refused at a few shops, she reverted to an atm machine that charged her an absurd 7-dollar fee to get some good old cash to pay for her modest purchases.

After she got back, we helped her look at the fine prints to realize she almost got lured in the big bank monthly fee trap. Her account is free to start but will become quite expensive after she turns 18. Hello high monthly fees!

We know financial institutions don’t always have your best interest at heart. After some more research and reflection, we recognized fees are everywhere and can be very harmful to your financial wellbeing. The good news is that alternatives exist to fight them.

This led us to one fundamental question: to get your children well started in their financial journey, what financial truth would you want to teach them? Our humble answer is to be extra wary about fees. They can be your worst financial enemy. Fortunately, they are often simple to avoid.

Note here that we assume kids know some basics like money is limited, you can work to earn money and you can buy stuff with money.

Ultimately, all those little misfortunes made us realize how costly fees can sometimes be. The good thing is that you can mostly avoid them. And that modest truth may be at the core of broader financial wisdom.

We have gradually become aware of senseless fees with experience. Now, we can even say we have developed a fierce aversion to them. As we get a little deeper into it, let’s hope we can make you realize the recurring ones are the worst kind and that low investment fees can be a crucial key to your financial success.

Most Fees Are Bad but Can Be Avoided

We think a good way to financially educate your kids is to tell them fees are usually bad, but alternatives often exist to avoid them. Teach them to have a look at the fine prints, to track down costly and oftentimes, useless fees.

Many fees serve you no purpose. They can only make other people or corporations richer.

It’s normal to spend your hard-earned money first, on necessities and then, on things you really like and enjoy. But useless fees are neither. Orient your budget towards basic needs and pleasure. After that, avoid the rest. Slash into senseless spending. Meaningful expenses have to either cover your essential needs or provide you enjoyment. Fees will rarely provide one or the other.

Show your children how to avoid fees like by simply being mindful about their financial affairs. The dumbest ones like late or penalty fees can easily be avoided that way. Also show them how to explore more elaborate ways to reduce fees. In many instances, a little research can do wonders to slash down on these undesirable futile features. Similarly, you can reach out to friends and family for references and tips. Just validate those “friendly” solutions before implementing them.

You still have to realize some fees are inevitable and others may be worth the expense because they can provide lasting quality. With time, it’s important to develop a critical sense about all of this.

Recurring Fees Can Slowly Disfigure Your Finances

In the personal finance realm, fees can be viewed as a sneaky disease that can leave you incapacitated or even paralyzed for a long while. It you are not careful; it could literally kill your finances.

Ironically, small fees that you often don’t even notice are the ones that can do the most damage. In the long run, recurring doses of what appears like trivial tiny fees can be devastating. That seemingly negligible yet overlooked ailment can do a lot of harm. In some cases, it can even be fatal, at least, to your financial wellbeing.

For fees as for expenses, the recurring ones are often the worst. We’ve already talked about how Reducing Recurring Expenses could do wonders to your wealth. The good news is that you could achieve similar miracles with fees. Slashing the recurring kind can greatly improve your financial situation.

Remember that just 10$ or 20$ a month could represent several hundred thousand dollars over your active life. So, the long-term impact of recurring fees cannot be denied.

All in all, we believe avoiding or reducing fees may now have become one of the main keys at the basis of successfully managing your personal finances.

That’s why we like to avoid fees like the plague. Banking fees. investment fees, the administration variety, the silly late or penalty fees…Fight back and slay them all!

High Fees Limit Investment Growth

One sphere of personal finance where fees may even be more important is investing. In fact, high investment fees are probably the worst-case scenario of recurring fees. Their effect is lasting for a long period of time and is multiplicated by the fact it often relates to huge sums of money.

Without warning, high investment fees can literally suck out millions out of your portfolio over time.

Let’s give an example of the scope of that problem. Let’s imagine you would invest only 10000$ once when you are 25 and look at what could happen with it when you get to retirement at 65. Let’s assume a 12% long-term return before fees — we know 12% is high but that’s even a little less than what we have managed to accomplish with our humble DIY Portfolio. Let’s compare it to a 10% return after a 2% annual investment fee.

10000$@12% for 40 years = 930510$
10000$@10% for 40 years = 452593$

Fee Difference = more than 475000$

Your 10000$ would transform into a little under a million (930510$) at 12% but only to 452593$ at 10%. That’s a difference of more than 475000$ only because of fees!

Now imagine if you invest 10000$ every year or even just 5000$ each year.

Luckily, relatively low-cost investing is now available to everyone. For instance, you could easily do indexing using ETFs with management expense ratios or fees often lower than 0.25%.

Or you could even reduce your fees more with the DIY investing route and like us, limit yourselves to a few transactions per year. With a 100000$ portfolio, even a little more like 10 annual transactions at 5$ only represent a 50$ fee or 0.05%. The great thing is that your fee percentage can even get lower as your portfolio grows.

On top of all that, the online investment industry is very competitive and zero-fee investing solutions are beginning to emerge, especially in the US. Soon enough, they should be accessible to all Canadians, provided you look and just ask for it.   

I hope you can now clearly see that low fees are one of the main ingredients of successful investing and that affordable fees are relatively easy to obtain.

Step 1 Homework

For now, we’ll focus on something much simpler: banking fees. They are another great example of recurring fees that can easily be avoided.

Your main task for this first homework consists of opening a no-fee chequing account.

Online banking will provide your best and maybe only options. We like Tangerine but several good choices exist out there.

You could compare fee structure with your soon out-of-date account or even accounts. Take time and make different types of minor transactions to get acquainted with the whole process. After a while, you could transfer your payroll deposit to your new no-fee account.

You should eventually be able to close your old useless-fee bank account. We suggest probably waiting at least six months. Make sure everything is transferred before you proceed. Meanwhile, also maintain old account minimum balance if it allows you to avoid or reduce monthly fees. Look out for inactivity fees if you take too much time to close your account

That will be all for today. Hope we’ve managed to inspire you to hunt down those senseless fees. Remember to particularly rush away from the measly recurring variety that can inflict chronic strain on your finances.

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