Lookout, Fees Are Everywhere!

“The biggest profit center for investment banks is the hefty fees they charge[…]”

-Alex Berenson

Remember in college when your parents would pop in to see you, inviting you out to lunch?  Free food! Yay! 

 

And yet, you have to listen to them talk about how they just discovered streaming videos. They ask you a million questions about what you’re doing, and who you’re doing it with. So was lunch free?  Really?

Hidden fees are everywhere

The point is to recognize that every service, almost every good, has some price, some way in which you pay for it – except maybe the air you breathe.  It is important to know when and how you pay so you’re the one deciding how to spend your money.  Something that sounds too good to be true usually isn’t true. 

Compare a bank offering free checking, but their savings accounts have a low interest rate, to  a bank
charges for checks, but offers much higher interest on savings.  If you had an emergency fund that earned
interest, paying for checking but earning more interest might be worth more
over time. 

Being savvy, comparing all the fees, really helps you manage your finances like: paying closing costs for a mortgage versus a “no closing cost” mortgage, buying a car one place for an all-inclusive price or going to a dealer that charges separately for delivery, registration, and such, investing with a broker who also provides “free” financial planning or using a discount broker and having to pay separately for the planning advice. 

Compare costs and keep more for you

Start paying attention to all the charges that go into your purchases.  If you know the total charges before you decide, then you can be sure you’ve used your time and money wisely.

We did not really touch on taxes.  Just like “free delivery,” government services are not free.  Even a volunteer fire department depends on town funds for its building and equipment, and those funds come from taxing town residents.  So you need to know when you owe taxes and for what. 

What Is Money?

Wealth is the ability to fully experience life.

– Henry David Thoreau

What would you do without money? Imagine carrying around leather coats you just finished stitching together from hides you tanned from an elk you shot and skinned, with the hope of finding someone willing to take them in exchange for that new smartphone you want …. Or imagine having to wash dishes at a restaurant to pay for the meal you wanted.  Not fun!  

 

Except if you’re ridiculously good at it.

The advent of money was a big deal in finance.  It created a standard.  As long as everyone accepts the value of money as a currency, it allows you to handle many financial transactions: you get paid, you buy goods, you pay for services, and you save.

Money stores the value of what you do for work

Without it, you would still be using the barter system, and you would have to be prepared to offer many jobs or diverse goods to make trades.  

Barter: the exchange of one good or service for another good or service.  

I went to the bank and asked to borrow a cup of money. They said, ‘What for?’ I said, ‘I’m going to buy some sugar.’ 

– Steven Wright

Money splits up the barter exchange: one person pays you money for your good or service; you use that money to go buy the goods or services you want.  This way, you no longer need the “double coincidence of wants.” 

With money, you have new possibilities  

As soon as you can store the value of your work, new possibilities arise.  First, you no longer need to be able to offer many services for barter, you can develop a special skill.  Second, money is “liquid,” meaning it is available whenever you need to use it compared to pulling out your fur coats from storage.  Finally, you can save up to buy big ticket items. 

How do you save enough to buy a car when you need the car to go to work to earn and save money?  There’s an app for that, it’s called credit – credit cards, revolving credit, short-term loans, long-term loans, etc.

Buying on credit 

The advent of loans to buy cars, sewing machines, refrigerators, and other items was another big deal in finance.  The short-term loan from a bank allows you to purchase and use a car right away, if you have good credit (more on building credit later).  Same goes for using a mortgage to buy a house.  

Credit cards are not money; they are a form of a short-term loan from a bank that you can use in place of money for purchasing goods or services.  

You then repay the lender all that you borrowed plus interest.  Of course, to keep your credit good, you have to make all the payments on your credit cards, car loans and mortgage on time. 

Benefits of money and credit, with some concerns

We now use apps to pay with our smartphones in place of money and even plastic credit cards.  The apps, like credit cards and money itself, are all part of finance.  

While this all sounds wonderful, there are some serious hitches:  as soon as you introduce money, you find many companies make money off of you almost any time you use money or credit:  bank fees, PayPal fees, investment fees and commissions, interest on loans, share of profits on sale, life insurance, commissions and real estate commissions.  

But then again, money permits you to purchase and own another type of asset: investments.  

More on fees and on investing in future posts – stay tuned!