Welcome back. Let’s take a look a a couple more of the money eroding factors.
Eroding Factor #5: Financial Expenses
Financial institutions don’t charge you money to keep your money with them, right? WRONG! We pay fees, advisors make commissions off of your money, and there always seems to be some kind of charge for anything you do within an institution.
We understand that there are some fees that we just can’t avoid, but more often than not we aren’t evaluating whether or not its worth paying fees for some of the financial products or services that we use. For example, many financial advisors charge a fee to meet with clients, and they have every right to. However, when a client comes to an advisor to invest $10,000 and the advisor charges $3,000 for a consultation, the said client is already 30% down on their investment. Kind of backwards, don’t you think?
Eroding Factor #6: Lost Opportunity Cost
Our same client that we mentioned earlier also experienced another eroding factor after being charged a consultation fee by his advisor. Its called lost opportunity cost. This is a commonly overlooked factor when it comes to people and their money, however, it is vital to understand when it comes to your financial planning.
What opportunities are you missing out on? The opportunity to make more money. Our client that was charged $3,000 in our discussion above can never make any money on that money again. It is lost, hence, lost opportunity cost. Let’s look at what our friend has lost. Assume that the client was to put his $3,000 into an account for twenty years that would have earned 6% every year. That same amount of money would have grown to $9,621.41! That’s over three times the amount of his original investment. Instead, the opportunity was lost on a fee. Let’s take that a step further. What if the client had to pay this same fee every year he had an annual review with his advisor? Our client doesn’t just lose $60,000 in fees, but he also loses the interest he would have earned on that amount over time. The lost opportunity cost comes out to $116,978.18! That’s half the cost of a decent home! Maybe our friend will think before he pays those kind of fees again.
There are many things that cause us have lost opportunity cost. How many of you have car or homeowner’s insurance? How many of you have never had a claim on either of those insuance policies? If you’re blessed enough to not have had a claim, then you have lost all of those premiums over time. Don’t get me wrong, I’m not saying that insurance is a bad thing. Its a very good and very powerful tool that is necessary in every financial plan.
The point is that we lose many opportunities to make the most of our money. Some are avoidable and some are unavoidable. We need to do our best to avoid unnecessary spending on financial products and to find places that will best meet our financial goals.
Stay tuned for part four of our money eroding factors next week.