Rather than focusing on smaller ticket items to pinch pennies, spend time this month to review these three areas and see how many thousands of dollars you can save toward your wealth.
Advisory Fees Quietly Chip Away At Your Investments
Most people have no idea how much they are actually paying their financial advisor. The fee is usually described as what feels like a tiny percentage like 0.25%, 0.50% or 1%.
There are typically two ways that financial advisors get paid — transaction fees when they move money for you between investments, and ongoing fees to hold and maintain your money for you.
If you’re investing as recommended over the course of at least a 20-year horizon, even those small fees can add up to tens of thousands of dollars. These feel invisible because they are not usually paid up front, and you have to pay close attention to your investments to notice the money leaking out.
You not only lose the money you pay for the fee, but you also lose any of the potential gain you could have earned on that fee.
The Securities and Exchange Commission’s Office of Investor Education and Advocacy offers data on how fees can impact your investments. For example, if you were to invest $100,000 over 20 years with a 4% annual return, a 1% annual fee would add up to almost $28,000 paid to your advisor.
If you were able to invest that $28,000, you could earn an additional $12,000 for yourself.
Now, this is not to say that having a financial advisor isn’t useful. But if you’re still in an accumulation phase versus a withdrawal phase, you may be able to manage your finances in a simpler way or with lower fees.
If you’re not getting much engagement or assistance from your advisor on major financial decisions, it’s worth questioning if the services are worth the price.
Taxes On Your Everyday Health And Wellness Products
Many people know that flexible spending accounts and health savings accounts are a way of setting aside money for out-of-pocket medical expenses. You might first think of paying for things like doctor visit co-pays, prescriptions or eye contacts.
But I’ve caught so many of my financial education students not using these spending accounts on everyday items such as:
- Menstrual products
- Sunscreen
- Incontinence products
- Mental health services including therapy and counseling
- Medical supplies like bandages, thermometers and ice packs
- Over-the-counter drugs such as ibuprofen, cold medicine and allergy medicine
- Baby supplies
A fast way to check this if products you are buying qualify for an HSA or FSA is to search the item on FSA Store or HSA store, even if you buy it at another retailer. If the item is available, it has already been approved for purchase with health account funds.
Money to fund your HSAs and FSAs are collected before taxes. These dollars lower your taxable income and therefore decrease the amount of income tax you pay while increasing your take-home pay.
Even if you don’t have employer-based health insurance, you may have the option of setting up an FSA or HSA through a third-party company.
Car Loan Interest Can Turn Your Budget Upside Down
I’ve personally seen many of my money coaching clients spending more than $1,000 a month on multiple car payments. Car dealers are apt at selling us buyers on a low monthly payment versus the total cost of a financed vehicle.
But new cars can lose as much as 20% of their worth in the first year, and they will continue depreciating in value, possibly to the point of having negative equity, or where you owe more on the loan than the value of the car.
According to Experian’s State of the Automotive Finance Market Report, the average loan amount financed for a new vehicle was $41,445 and the loan amount for a used car was $27,768 in the fourth quarter of 2022.
Increasing interest rates are keeping average monthly payments above $700. The average interest rate for new-vehicle loans is an estimated 6.7% in March 2023.
Using a debt payoff calculator with these average numbers for a new car loan with a $700 payment, it would cost $9,008 in interest and take six years and one month to pay off a new car.
Stop and ask yourself if you want to pay that much extra cash for the same car. You can think of it as an investment by saving the amount you would have paid in interest.
Paying off your car loan helps increase your monthly cash flow to spend on other assets that aren’t depreciating like your vehicle. I encourage my students to pay off their cars if they have the cash available because it also reduces the amount you need for emergency funds should you lose your income.
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