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Money Mistake #5: You Paid Too Much in Fees

It happens so often you may be numb to them by now: the carry-on-bag cost to the FCC line charge to the inconvenient "convenience fee" for ordering your movie tickets online. But here are a few entirely unnecessary fees that can really add up.

Prepaid cards: To take one example, the Rush Unlimited Card from Visa charges $3.95 to $14.95 for signing up, depending on which design you choose. (Seriously.) A monthly fee of up to $7.95, $2.50 for a cash withdrawal, and 50 cents just for checking your balance. Want a paper statement? That's another buck. Do you avoid carrying cash for fear you might lose it? Prepaid cards guarantee you will.

Solution: If you have enough money to load a prepaid card, you can open a savings account at many credit unions or an online bank such as ING Direct. There is no minimum. There are no fees. You get a free debit card. And instead of you paying the bank, the bank pays you a little bit of interest.

Layaway: There's something appealing about the return of the old-fashioned layaway—you don't own the item until you've actually ponied up the cash. But several large department and discount stores charge fees of $5 to $10, plus cancellation fees of $10 to $25.

Solution: Get an envelope, put your payments in it every two weeks, and once you have enough to pay for the item, head to the store.

Mutual funds: There may be no single fee that will take more of your money over your lifetime than the expense ratio in your mutual funds. When writing my book, I had to run the math on two different calculators, because the numbers were so big I was sure I'd made a mistake. All funds charge fees, but by using low-cost index funds, you'll save tons of money.

Here's an example using an SEC calculator: Lisa is 30 years old, and she and her husband have $40,000 in stock funds their 401(k)s. If the funds charge the average expense ratio of 1.3 percent, they will have $270,000 at age 65, assuming 7 percent annual returns and no more contributions. If they invest instead in a low-cost index fund that charges 0.07 percent, and earn the same return, they would have $417,000 at retirement. That 1.3 percent eats up $170,000 over three decades. Expense ratios are the single best indicator of returns: The lower they are, the more you'll make.

Solution: Log on to your 401(k), check the expense ratios on your funds today, and if you have the option, switch into index funds. If you have an old 401(k) that doesn't offer index funds, consider rolling it over into an IRA, where you get to choose the investments.

Money Mistake #6: You Fell in Love

Love can cause money problems—but not the ones you might expect. Most individuals have an internal financial math that makes their budget work: They cheap out on the things they don't care about and splurge on things they value. For instance, you may be perfectly happy to keep your grocery bills low by eating cereal eight times a week so you can splash out on clothing. Then you fall in love with a guy who lives in blue jeans and flip-flops but would never eat day-old bread. It's easy to start sharing each other's pleasures, but hard to give up our own. So you take his wardrobe up a notch, and he buys truffle salt at the grocery store...and as a couple, you pile on the new expenses while abandoning your former budgeting strategies.

Solution: Asking partners to stop doing the things that make them happy is a great way to build resentment and encourage financial infidelity. So instead, start with the fun stuff: Come up with a list of what you both value most and together build a budget that will help you achieve those goals. During that process, you'll each have to make sacrifices, but it won't feel as if your partner is living it up while you are being denied.

Jack Otter is the executive editor of CBS MoneyWatch.com and author of new finances-made-easy book Worth It...Not Worth It.

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Published 05/02/2012

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